Essentra's (LON:ESNT five-year decrease in earnings delivers investors with a 6.3% loss

By
Simply Wall St
Published
January 25, 2022
LSE:ESNT
Source: Shutterstock

Essentra plc (LON:ESNT) shareholders should be happy to see the share price up 15% in the last quarter. But that doesn't change the fact that the returns over the last five years have been less than pleasing. You would have done a lot better buying an index fund, since the stock has dropped 20% in that half decade.

If the past week is anything to go by, investor sentiment for Essentra isn't positive, so let's see if there's a mismatch between fundamentals and the share price.

Check out our latest analysis for Essentra

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.

During the five years over which the share price declined, Essentra's earnings per share (EPS) dropped by 20% each year. The share price decline of 4% per year isn't as bad as the EPS decline. So the market may previously have expected a drop, or else it expects the situation will improve. The high P/E ratio of 54.25 suggests that shareholders believe earnings will grow in the years ahead.

The company's earnings per share (over time) is depicted in the image below (click to see the exact numbers).

earnings-per-share-growth
LSE:ESNT Earnings Per Share Growth January 25th 2022

We know that Essentra has improved its bottom line over the last three years, but what does the future have in store? You can see how its balance sheet has strengthened (or weakened) over time in this free interactive graphic.

What About Dividends?

It is important to consider the total shareholder return, as well as the share price return, for any given stock. 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. So for companies that pay a generous dividend, the TSR is often a lot higher than the share price return. We note that for Essentra the TSR over the last 5 years was -6.3%, which is better than the share price return mentioned above. This is largely a result of its dividend payments!

A Different Perspective

It's good to see that Essentra has rewarded shareholders with a total shareholder return of 15% in the last twelve months. That's including the dividend. There's no doubt those recent returns are much better than the TSR loss of 1.2% per year over five years. The long term loss makes us cautious, but the short term TSR gain certainly hints at a brighter future. I find it very interesting to look at share price over the long term as a proxy for business performance. But to truly gain insight, we need to consider other information, too. For example, we've discovered 1 warning sign for Essentra that you should be aware of before investing here.

Of course Essentra 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 GB exchanges.

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