If You Had Bought Gem Diamonds' (LON:GEMD) Shares Five Years Ago You Would Be Down 61%

While not a mind-blowing move, it is good to see that the Gem Diamonds Limited (LON:GEMD) share price has gained 24% in the last three months. But that can't change the reality that over the longer term (five years), the returns have been really quite dismal. In that time the share price has delivered a rude shock to holders, who find themselves down 61% after a long stretch. Some might say the recent bounce is to be expected after such a bad drop. However, in the best case scenario (far from fait accompli), this improved performance might be sustained.

See our latest analysis for Gem Diamonds

While markets are a powerful pricing mechanism, share prices reflect investor sentiment, not just underlying business performance. One imperfect but simple way to consider how the market perception of a company has shifted is to compare the change in the earnings per share (EPS) with the share price movement.

Gem Diamonds became profitable within the last five years. Most would consider that to be a good thing, so it's counter-intuitive to see the share price declining. Other metrics may better explain the share price move.

Arguably, the revenue drop of 4.2% a year for half a decade suggests that the company can't grow in the long term. That could explain the weak share price.

The image below shows how earnings and revenue have tracked over time (if you click on the image you can see greater detail).

It is of course excellent to see how Gem Diamonds has grown profits over the years, but the future is more important for shareholders. You can see how its balance sheet has strengthened (or weakened) over time in this free interactive graphic.

A Different Perspective

While the broader market lost about 3.7% in the twelve months, Gem Diamonds shareholders did even worse, losing 26%. Having said that, it's inevitable that some stocks will be oversold in a falling market. The key is to keep your eyes on the fundamental developments. Regrettably, last year's performance caps off a bad run, with the shareholders facing a total loss of 10% per year over five years. 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. It's always interesting to track share price performance over the longer term. But to understand Gem Diamonds better, we need to consider many other factors. Consider for instance, the ever-present spectre of investment risk. We've identified 3 warning signs with Gem Diamonds , and understanding them should be part of your investment process.

For those who like to find winning investments this free list of growing 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 GB exchanges.

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This article by Simply Wall St is general in nature. 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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