By buying an index fund, investors can approximate the average market return. But if you buy good businesses at attractive prices, your portfolio returns could exceed the average market return. Just take a look at Sichuan Kelun Pharmaceutical Co., Ltd. (SZSE:002422), which is up 50%, over three years, soundly beating the market decline of 18% (not including dividends). However, more recent returns haven't been as impressive as that, with the stock returning just 3.5% in the last year , including dividends .

On the back of a solid 7-day performance, let's check what role the company's fundamentals have played in driving long term shareholder returns.

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.

During three years of share price growth, Sichuan Kelun Pharmaceutical achieved compound earnings per share growth of 60% per year. This EPS growth is higher than the 14% average annual increase in the share price. So one could reasonably conclude that the market has cooled on the stock.

The image below shows how EPS has tracked over time (if you click on the image you can see greater detail).

It is of course excellent to see how Sichuan Kelun Pharmaceutical has grown profits over the years, but the future is more important for shareholders. It might be well worthwhile taking a look at our free report on how its financial position has changed over time.

What About Dividends?

When looking at investment returns, it is important to consider the difference between total shareholder return (TSR) and share price return. Whereas the share price return only reflects the change in the share price, the TSR includes the value of dividends (assuming they were reinvested) and the benefit of any discounted capital raising or spin-off. It's fair to say that the TSR gives a more complete picture for stocks that pay a dividend. We note that for Sichuan Kelun Pharmaceutical the TSR over the last 3 years was 59%, which is better than the share price return mentioned above. The dividends paid by the company have thusly boosted the total shareholder return.

A Different Perspective

We're pleased to report that Sichuan Kelun Pharmaceutical shareholders have received a total shareholder return of 3.5% over one year. Of course, that includes the dividend. However, that falls short of the 4% TSR per annum it has made for shareholders, each year, over five years. I find it very interesting to look at share price over the long term as a proxy for business performance. But to truly gain insight, we need to consider other information, too. For instance, we've identified 2 warning signs for Sichuan Kelun Pharmaceutical that you should be aware of.

If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).

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.