Xero (ASX:XRO) shareholders have earned a 28% CAGR over the last three years

While Xero Limited (ASX:XRO) shareholders are probably generally happy, the stock hasn't had particularly good run recently, with the share price falling 12% in the last quarter. But that doesn't change the fact that the returns over the last three years have been very strong. In fact, the share price is up a full 112% compared to three years ago. It's not uncommon to see a share price retrace a bit, after a big gain. The fundamental business performance will ultimately dictate whether the top is in, or if this is a stellar buying opportunity.

So let's investigate and see if the longer term performance of the company has been in line with the underlying business' progress.

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While Xero made a small profit, in the last year, we think that the market is probably more focussed on the top line growth at the moment. As a general rule, we think this kind of company is more comparable to loss-making stocks, since the actual profit is so low. For shareholders to have confidence a company will grow profits significantly, it must grow revenue.

Over the last three years Xero has grown its revenue at 21% annually. That's well above most pre-profit companies. Meanwhile, the share price performance has been pretty solid at 28% compound over three years. This suggests the market has recognized the progress the business has made, at least to a significant degree. Nonetheless, we'd say Xero is still worth investigating - successful businesses can often keep growing for long periods.

The image below shows how earnings and revenue have tracked over time (if you click on the image you can see greater detail).

It's good to see that there was some significant insider buying in the last three months. That's a positive. On the other hand, we think the revenue and earnings trends are much more meaningful measures of the business. If you are thinking of buying or selling Xero stock, you should check out this free report showing analyst profit forecasts.

A Different Perspective

Xero shareholders gained a total return of 2.9% during the year. Unfortunately this falls short of the market return. On the bright side, the longer term returns (running at about 6% a year, over half a decade) look better. It's quite possible the business continues to execute with prowess, even as the share price gains are slowing. Investors who like to make money usually check up on insider purchases, such as the price paid, and total amount bought. You can find out about the insider purchases of Xero by clicking this link.

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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.