STEF's (EPA:STF) five-year earnings growth trails the favorable shareholder returns

If you want to compound wealth in the stock market, you can do so by buying an index fund. But the truth is, you can make significant gains if you buy good quality businesses at the right price. For example, the STEF SA (EPA:STF) share price is up 55% in the last five years, slightly above the market return. It's fair to say the stock has continued its long term trend in the last year, over which it has risen 28%.

Since the stock has added €47m 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 STEF

There is no denying that markets are sometimes efficient, but prices do not always reflect underlying business performance. 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 five years of share price growth, STEF achieved compound earnings per share (EPS) growth of 8.5% per year. This EPS growth is reasonably close to the 9% average annual increase in the share price. Therefore one could conclude that sentiment towards the shares hasn't morphed very much. In fact, the share price seems to largely reflect the EPS growth.

The image below shows how EPS has tracked over time (if you click on the image you can see greater detail).

We know that STEF has improved its bottom line lately, but is it going to grow revenue? You could check out this free report showing analyst revenue forecasts.

What About Dividends?

When looking at investment returns, it is important to consider the difference between total shareholder return (TSR) and share price return. 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. So for companies that pay a generous dividend, the TSR is often a lot higher than the share price return. As it happens, STEF's TSR for the last 5 years was 79%, which exceeds the share price return mentioned earlier. This is largely a result of its dividend payments!

A Different Perspective

We're pleased to report that STEF shareholders have received a total shareholder return of 33% over one year. That's including the dividend. That gain is better than the annual TSR over five years, which is 12%. Therefore it seems like sentiment around the company has been positive lately. Given the share price momentum remains strong, it might be worth taking a closer look at the stock, lest you miss an opportunity. 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. For example, we've discovered 2 warning signs for STEF that you should be aware of before investing here.

We will like STEF better if we see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.

Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on French 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.