The five-year decline in earnings might be taking its toll on Fortescue (ASX:FMG) shareholders as stock falls 5.7% over the past week

If you buy and hold a stock for many years, you'd hope to be making a profit. Better yet, you'd like to see the share price move up more than the market average. But Fortescue Ltd (ASX:FMG) has fallen short of that second goal, with a share price rise of 21% over five years, which is below the market return. However, if you include the dividends then the return is market beating. Zooming in, the stock is up just 2.7% in the last year.

Although Fortescue has shed AU$3.7b from its market cap this week, let's take a look at its longer term fundamental trends and see if they've driven returns.

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While the efficient markets hypothesis continues to be taught by some, it has been proven that markets are over-reactive dynamic systems, and investors are not always rational. 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.

Fortescue's earnings per share are down 6.5% per year, despite strong share price performance over five years.

The strong decline in earnings per share suggests the market isn't using EPS to judge the company. The falling EPS doesn't correlate with the climbing share price, so it's worth taking a look at other metrics.

There's no sign of growing dividends, which might have explained the resilient share price. The revenue decline of 0.6% wouldn't have helped. So it seems one might have to take closer look at earnings and revenue trends to see how they might influence the share price.

You can see how earnings and revenue have changed over time in the image below (click on the chart to see the exact values).

We like that insiders have been buying shares in the last twelve months. Having said that, most people consider earnings and revenue growth trends to be a more meaningful guide to the business. If you are thinking of buying or selling Fortescue stock, you should check out this free report showing analyst profit forecasts.

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. It's fair to say that the TSR gives a more complete picture for stocks that pay a dividend. As it happens, Fortescue's TSR for the last 5 years was 105%, which exceeds the share price return mentioned earlier. And there's no prize for guessing that the dividend payments largely explain the divergence!

A Different Perspective

Fortescue provided a TSR of 9.0% over the year (including dividends). That's fairly close to the broader market return. It has to be noted that the recent return falls short of the 15% shareholders have gained each year, over half a decade. Although the share price growth has slowed, the longer term story points to a business well worth watching. 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. Even so, be aware that Fortescue is showing 3 warning signs in our investment analysis , and 1 of those makes us a bit uncomfortable...

Fortescue is not the only stock insiders are buying. So take a peek at this free list of small cap companies at attractive valuations which insiders have been buying.

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.