Rumo (BVMF:RAIL3) grows 7.3% this week, taking three-year gains to 27%

By buying an index fund, you can roughly match the market return with ease. But if you pick the right individual stocks, you could make more than that. For example, Rumo S.A. (BVMF:RAIL3) shareholders have seen the share price rise 25% over three years, well in excess of the market decline (7.6%, not including dividends).

Since the stock has added R$2.4b to its market cap in the past week alone, let's see if underlying performance has been driving long-term returns.

View our latest analysis for Rumo

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.

During the three years of share price growth, Rumo actually saw its earnings per share (EPS) drop 9.7% per year. In this instance, recent extraordinary items impacted the earnings.

So we doubt that the market is looking to EPS for its main judge of the company's value. Since the change in EPS doesn't seem to correlate with the change in share price, it's worth taking a look at other metrics.

The modest 0.5% dividend yield is unlikely to be propping up the share price. It may well be that Rumo revenue growth rate of 19% over three years has convinced shareholders to believe in a brighter future. In that case, the company may be sacrificing current earnings per share to drive growth, and maybe shareholder's faith in better days ahead will be rewarded.

You can see below how earnings and revenue have changed over time (discover the exact values by clicking on the image).

Rumo is a well known stock, with plenty of analyst coverage, suggesting some visibility into future growth. You can see what analysts are predicting for Rumo in this interactive graph of future profit estimates.

A Different Perspective

We regret to report that Rumo shareholders are down 17% for the year (even including dividends). Unfortunately, that's worse than the broader market decline of 0.5%. However, it could simply be that the share price has been impacted by broader market jitters. It might be worth keeping an eye on the fundamentals, in case there's a good opportunity. Unfortunately, last year's performance may indicate unresolved challenges, given that it was worse than the annualised loss of 3% over the last half decade. Generally speaking long term share price weakness can be a bad sign, though contrarian investors might want to research the stock in hope of a turnaround. Shareholders might want to examine this detailed historical graph of past earnings, revenue and cash flow.

Of course Rumo may not be the best stock to buy. So you may wish to see this free collection of growth stocks.

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.