Companhia de Saneamento Básico do Estado de São Paulo - SABESP's (BVMF:SBSP3) three-year earnings growth trails the 16% YoY shareholder returns

You can receive the average market return by buying a low-cost index fund. But you can make superior returns by picking better-than average stocks. Notably, the Companhia de Saneamento Básico do Estado de São Paulo - SABESP (BVMF:SBSP3) share price has gained 47% in three years, which is better than the average market return. The bad news is that the share price seems to lack positive momentum recently, since it has dropped 25% in the last year.

The past week has proven to be lucrative for Companhia de Saneamento Básico do Estado de São Paulo - SABESP investors, so let's see if fundamentals drove the company's three-year performance.

Check out our latest analysis for Companhia de Saneamento Básico do Estado de São Paulo - SABESP

To quote Buffett, 'Ships will sail around the world but the Flat Earth Society will flourish. There will continue to be wide discrepancies between price and value in the marketplace...' 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).

During three years of share price growth, Companhia de Saneamento Básico do Estado de São Paulo - SABESP achieved compound earnings per share growth of 3.5% per year. This EPS growth is lower than the 14% average annual increase in the share price. This suggests that, as the business progressed over the last few years, it gained the confidence of market participants. That's not necessarily surprising considering the three-year track record of earnings growth.

You can see how EPS has changed over time in the image below (click on the chart to see the exact values).

We know that Companhia de Saneamento Básico do Estado de São Paulo - SABESP has improved its bottom line lately, but is it going to grow revenue? This free report showing analyst revenue forecasts should help you figure out if the EPS growth can be sustained.

What About Dividends?

When looking at investment returns, it is important to consider the difference between total shareholder return (TSR) and share price return. The TSR is a return calculation that accounts for the value of cash dividends (assuming that any dividend received was reinvested) and the calculated value of any discounted capital raisings and spin-offs. It's fair to say that the TSR gives a more complete picture for stocks that pay a dividend. In the case of Companhia de Saneamento Básico do Estado de São Paulo - SABESP, it has a TSR of 57% for the last 3 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

Investors in Companhia de Saneamento Básico do Estado de São Paulo - SABESP had a tough year, with a total loss of 24% (including dividends), against a market gain of about 16%. Even the share prices of good stocks drop sometimes, but we want to see improvements in the fundamental metrics of a business, before getting too interested. On the bright side, long term shareholders have made money, with a gain of 6% per year over half a decade. If the fundamental data continues to indicate long term sustainable growth, the current sell-off could be an opportunity worth considering. 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 be aware of the 1 warning sign we've spotted with Companhia de Saneamento Básico do Estado de São Paulo - SABESP .

But note: Companhia de Saneamento Básico do Estado de São Paulo - SABESP 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 BR 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.
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