The Shenzhen Zhongheng Huafa Co., Ltd. (SZSE:000020) share price has had a bad week, falling 28%. But that doesn't change the fact that the returns over the last three years have been pleasing. After all, the share price is up a market-beating 89% in that time.

While the stock has fallen 28% this week, it's worth focusing on the longer term and seeing if the stocks historical returns have been driven by the underlying fundamentals.

In his essay The Superinvestors of Graham-and-Doddsville Warren Buffett described how share prices do not always rationally reflect the value of a business. One imperfect but simple way to consider how the market perception of a company has shifted is to compare the change in the earnings per share (EPS) with the share price movement.

Shenzhen Zhongheng Huafa was able to grow its EPS at 26% per year over three years, sending the share price higher. We don't think it is entirely coincidental that the EPS growth is reasonably close to the 24% average annual increase in the share price. This observation indicates that the market's attitude to the business hasn't changed all that much. Quite to the contrary, the share price has arguably reflected the EPS growth.

The graphic below depicts how EPS has changed over time (unveil the exact values by clicking on the image).

It's probably worth noting that the CEO is paid less than the median at similar sized companies. It's always worth keeping an eye on CEO pay, but a more important question is whether the company will grow earnings throughout the years. Dive deeper into the earnings by checking this interactive graph of Shenzhen Zhongheng Huafa's earnings, revenue and cash flow.

A Different Perspective

It's nice to see that Shenzhen Zhongheng Huafa shareholders have received a total shareholder return of 48% over the last year. That gain is better than the annual TSR over five years, which is 8%. Therefore it seems like sentiment around the company has been positive lately. In the best case scenario, this may hint at some real business momentum, implying that now could be a great time to delve deeper. While it is well worth considering the different impacts that market conditions can have on the share price, there are other factors that are even more important. Consider for instance, the ever-present spectre of investment risk. We've identified 2 warning signs with Shenzhen Zhongheng Huafa (at least 1 which is potentially serious) , and understanding them should be part of your investment process.

But note: Shenzhen Zhongheng Huafa may not be the best stock to buy. So take a peek at this free list of interesting companies with past earnings growth (and further growth forecast).

Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on Chinese exchanges.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.