Australian Ethical Investment's (ASX:AEF) five-year earnings growth trails the 23% YoY shareholder returns

The most you can lose on any stock (assuming you don't use leverage) is 100% of your money. But when you pick a company that is really flourishing, you can make more than 100%. For instance, the price of Australian Ethical Investment Limited (ASX:AEF) stock is up an impressive 157% over the last five years. Better yet, the share price has risen 11% in the last week.

Since the stock has added AU$50m 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 Australian Ethical Investment

There is no denying that markets are sometimes efficient, but prices do not always reflect underlying business performance. 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, Australian Ethical Investment managed to grow its earnings per share at 4.6% a year. This EPS growth is lower than the 21% average annual increase in the share price. So it's fair to assume the market has a higher opinion of the business than it did five years ago. And that's hardly shocking given the track record of growth. This favorable sentiment is reflected in its (fairly optimistic) P/E ratio of 73.40.

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

Dive deeper into Australian Ethical Investment's key metrics by checking this interactive graph of Australian Ethical Investment's earnings, revenue and cash flow.

What About Dividends?

It is important to consider the total shareholder return, as well as the share price return, for any given stock. 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. Arguably, the TSR gives a more comprehensive picture of the return generated by a stock. In the case of Australian Ethical Investment, it has a TSR of 177% 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

Australian Ethical Investment shareholders are down 4.6% for the year (even including dividends), but the market itself is up 4.4%. However, keep in mind that even the best stocks will sometimes underperform the market over a twelve month period. On the bright side, long term shareholders have made money, with a gain of 23% per year over half a decade. 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. It's always interesting to track share price performance over the longer term. But to understand Australian Ethical Investment better, we need to consider many other factors. Even so, be aware that Australian Ethical Investment is showing 2 warning signs in our investment analysis , you should know about...

But note: Australian Ethical Investment may not be the best stock to buy. So take a peek at this free list of interesting companies with past earnings growth (and further growth forecast).

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

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.