Downer EDI (ASX:DOW) shareholder returns have been respectable, earning 40% in 1 year

If you want to compound wealth in the stock market, you can do so by buying an index fund. But one can do better than that by picking better than average stocks (as part of a diversified portfolio). For example, the Downer EDI Limited (ASX:DOW) share price is up 36% in the last 1 year, clearly besting the market return of around 10% (not including dividends). That's a solid performance by our standards! The longer term returns have not been as good, with the stock price only 3.3% higher than it was three years ago.

Since the stock has added AU$147m to its market cap in the past week alone, let's see if underlying performance has been driving long-term returns.

See our latest analysis for Downer EDI

There is no denying that markets are sometimes efficient, but prices do not always reflect underlying business performance. By comparing earnings per share (EPS) and share price changes over time, we can get a feel for how investor attitudes to a company have morphed over time.

Downer EDI went from making a loss to reporting a profit, in the last year.

We think the growth looks very prospective, so we're not surprised the market liked it too. Generally speaking the profitability inflection point is a great time to research a company closely, lest you miss an opportunity to profit.

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

We know that Downer EDI has improved its bottom line lately, but is it going to grow revenue? This free report showing analyst revenue forecasts should help you figure out if the EPS growth can be sustained.

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. In the case of Downer EDI, it has a TSR of 40% for the last 1 year. That exceeds its share price return that we previously mentioned. This is largely a result of its dividend payments!

A Different Perspective

It's good to see that Downer EDI has rewarded shareholders with a total shareholder return of 40% in the last twelve months. And that does include the dividend. There's no doubt those recent returns are much better than the TSR loss of 1.3% per year over five years. This makes us a little wary, but the business might have turned around its fortunes. 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 Downer EDI that you should be aware of.

For those who like to find winning investments this free list of undervalued companies with recent insider purchasing, could be just the ticket.

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.