Environmental Group (ASX:EGL) sheds 25% this week, as yearly returns fall more in line with earnings growth

The Environmental Group Limited (ASX:EGL) shareholders might be rather concerned because the share price has dropped 32% in the last month. But that doesn't undermine the fantastic longer term performance (measured over five years). In that time, the share price has soared some 511% higher! So we don't think the recent decline in the share price means its story is a sad one. The most important thing for savvy investors to consider is whether the underlying business can justify the share price gain. We love happy stories like this one. The company should be really proud of that performance!

Since the long term performance has been good but there's been a recent pullback of 25%, let's check if the fundamentals match the share price.

See our latest analysis for Environmental Group

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).

Over half a decade, Environmental Group managed to grow its earnings per share at 26% a year. This EPS growth is slower than the share price growth of 44% per year, over the same period. This suggests that market participants hold the company in higher regard, these days. That's not necessarily surprising considering the five-year track record of earnings growth.

You can see how EPS has changed over time in the image below (click on the chart to see the exact values).

We know that Environmental Group has improved its bottom line lately, but is it going to grow revenue? Check if analysts think Environmental Group will grow revenue in the future.

What About The Total Shareholder Return (TSR)?

We'd be remiss not to mention the difference between Environmental Group's total shareholder return (TSR) and its 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. Its history of dividend payouts mean that Environmental Group's TSR of 519% over the last 5 years is better than the share price return.

A Different Perspective

Environmental Group shareholders are up 20% for the year. But that return falls short of the market. If we look back over five years, the returns are even better, coming in at 44% per year for five years. It may well be that this is a business worth popping on the watching, given the continuing positive reception, over time, from the market. It's always interesting to track share price performance over the longer term. But to understand Environmental Group 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 Environmental Group , and understanding them should be part of your investment process.

If you would prefer to check out another company -- one with potentially superior financials -- then do not miss this free list of companies that have proven they can grow earnings.

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