Generally speaking the aim of active stock picking is to find companies that provide returns that are superior to the market average. And while active stock picking involves risks (and requires diversification) it can also provide excess returns. For example, the Sichuan Hebang Biotechnology Corporation Limited (SHSE:603077) share price is up 49% in the last 5 years, clearly besting the market return of around 18% (ignoring dividends).

The past week has proven to be lucrative for Sichuan Hebang Biotechnology investors, so let's see if fundamentals drove the company's five-year performance.

While markets are a powerful pricing mechanism, share prices reflect investor sentiment, not just underlying business performance. One flawed but reasonable way to assess how sentiment around a company has changed is to compare the earnings per share (EPS) with the share price.

During five years of share price growth, Sichuan Hebang Biotechnology achieved compound earnings per share (EPS) growth of 8.2% per year. This EPS growth is remarkably close to the 8% average annual increase in the share price. Therefore one could conclude that sentiment towards the shares hasn't morphed very much. In fact, the share price seems to largely reflect the EPS growth.

The company's earnings per share (over time) is depicted in the image below (click to see the exact numbers).

Dive deeper into Sichuan Hebang Biotechnology's key metrics by checking this interactive graph of Sichuan Hebang Biotechnology's earnings, revenue and cash flow.

What About Dividends?

When looking at investment returns, it is important to consider the difference between total shareholder return (TSR) and share price return. 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. In the case of Sichuan Hebang Biotechnology, it has a TSR of 54% for the last 5 years. That exceeds its share price return that we previously mentioned. And there's no prize for guessing that the dividend payments largely explain the divergence!

A Different Perspective

Sichuan Hebang Biotechnology shareholders are down 8.4% for the year (even including dividends), but the market itself is up 7.8%. Even the share prices of good stocks drop sometimes, but we want to see improvements in the fundamental metrics of a business, before getting too interested. Longer term investors wouldn't be so upset, since they would have made 9%, each year, over five years. It could be that the recent sell-off is an opportunity, so it may be worth checking the fundamental data for signs of a long term growth trend. 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 Sichuan Hebang Biotechnology , and understanding them should be part of your investment process.

We will like Sichuan Hebang Biotechnology better if we see some big insider buys. While we wait, check out this free list of undervalued stocks (mostly small caps) with considerable, recent, insider buying.

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.