It might be of some concern to shareholders to see the Zhejiang Xinao Textiles Inc. (SHSE:603889) share price down 11% in the last month. In contrast, the return over three years has been impressive. In fact, the share price is up a full 107% compared to three years ago. It's not uncommon to see a share price retrace a bit, after a big gain. Only time will tell if there is still too much optimism currently reflected in the share price.

While the stock has fallen 6.8% 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 way to examine how market sentiment has changed over time is to look at the interaction between a company's share price and its earnings per share (EPS).

Zhejiang Xinao Textiles was able to grow its EPS at 57% per year over three years, sending the share price higher. This EPS growth is higher than the 27% average annual increase in the share price. So one could reasonably conclude that the market has cooled on the stock.

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

We know that Zhejiang Xinao Textiles has improved its bottom line over the last three years, but what does the future have in store? You can see how its balance sheet has strengthened (or weakened) over time in this free interactive graphic.

What About Dividends?

It is important to consider the total shareholder return, as well as the share price return, for any given stock. The TSR is a return calculation that accounts for the value of cash dividends (assuming that any dividend received was reinvested) and the calculated value of any discounted capital raisings and spin-offs. Arguably, the TSR gives a more comprehensive picture of the return generated by a stock. As it happens, Zhejiang Xinao Textiles' TSR for the last 3 years was 137%, which exceeds the share price return mentioned earlier. This is largely a result of its dividend payments!

A Different Perspective

We're pleased to report that Zhejiang Xinao Textiles shareholders have received a total shareholder return of 24% over one year. That's including the dividend. Since the one-year TSR is better than the five-year TSR (the latter coming in at 8% per year), it would seem that the stock's performance has improved in recent times. Someone with an optimistic perspective could view the recent improvement in TSR as indicating that the business itself is getting better with time. It's always interesting to track share price performance over the longer term. But to understand Zhejiang Xinao Textiles better, we need to consider many other factors. Consider for instance, the ever-present spectre of investment risk. We've identified 2 warning signs with Zhejiang Xinao Textiles (at least 1 which is a bit unpleasant) , and understanding them should be part of your investment process.

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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.