Direcional Engenharia (BVMF:DIRR3) sheds 7.9% this week, as yearly returns fall more in line with earnings growth

Direcional Engenharia S.A. (BVMF:DIRR3) shareholders might be concerned after seeing the share price drop 10% in the last month. But that doesn't change the fact that the returns over the last three years have been very strong. Indeed, the share price is up a very strong 164% in that time. It's not uncommon to see a share price retrace a bit, after a big gain. The thing to consider is whether the underlying business is doing well enough to support the current price.

In light of the stock dropping 7.9% in the past week, we want to investigate the longer term story, and see if fundamentals have been the driver of the company's positive three-year return.

See our latest analysis for Direcional Engenharia

To paraphrase Benjamin Graham: Over the short term the market is a voting machine, but over the long term it's a weighing machine. 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.

Direcional Engenharia was able to grow its EPS at 44% per year over three years, sending the share price higher. We don't think it is entirely coincidental that the EPS growth is reasonably close to the 38% average annual increase in the share price. This suggests that sentiment and expectations have not changed drastically. Au contraire, the share price change has arguably mimicked the EPS growth.

You can see below how EPS has changed over time (discover the exact values by clicking on the image).

It is of course excellent to see how Direcional Engenharia has grown profits over the years, but the future is more important for shareholders. This free interactive report on Direcional Engenharia's balance sheet strength is a great place to start, if you want to investigate the stock further.

What About Dividends?

As well as measuring the share price return, investors should also consider the total shareholder return (TSR). The TSR incorporates the value of any spin-offs or discounted capital raisings, along with any dividends, based on the assumption that the dividends are reinvested. It's fair to say that the TSR gives a more complete picture for stocks that pay a dividend. We note that for Direcional Engenharia the TSR over the last 3 years was 221%, which is better than the share price return mentioned above. And there's no prize for guessing that the dividend payments largely explain the divergence!

A Different Perspective

It's nice to see that Direcional Engenharia shareholders have received a total shareholder return of 54% over the last year. And that does include the dividend. That gain is better than the annual TSR over five years, which is 24%. Therefore it seems like sentiment around the company has been positive lately. Someone with an optimistic perspective could view the recent improvement in TSR as indicating that the business itself is getting better with time. While it is well worth considering the different impacts that market conditions can have on the share price, there are other factors that are even more important. To that end, you should learn about the 2 warning signs we've spotted with Direcional Engenharia (including 1 which doesn't sit too well with us) .

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 Brazilian 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.