Earnings growth of 4.5% over 1 year hasn't been enough to translate into positive returns for Supreme (LON:SUP) shareholders

Passive investing in an index fund is a good way to ensure your own returns roughly match the overall market. Active investors aim to buy stocks that vastly outperform the market - but in the process, they risk under-performance. That downside risk was realized by Supreme Plc (LON:SUP) shareholders over the last year, as the share price declined 17%. That's well below the market return of 5.3%. Because Supreme hasn't been listed for many years, the market is still learning about how the business performs. It's down 34% in about a quarter.

Since Supreme has shed UK£25m from its value in the past 7 days, let's see if the longer term decline has been driven by the business' economics.

View our latest analysis for Supreme

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 the unfortunate twelve months during which the Supreme share price fell, it actually saw its earnings per share (EPS) improve by 4.5%. It's quite possible that growth expectations may have been unreasonable in the past.

It seems quite likely that the market was expecting higher growth from the stock. But looking to other metrics might better explain the share price change.

Given the yield is quite low, at 1.4%, we doubt the dividend can shed much light on the share price. Supreme's revenue is actually up 18% over the last year. Since the fundamental metrics don't readily explain the share price drop, there might be an opportunity if the market has overreacted.

The company's revenue and earnings (over time) are depicted in the image below (click to see the exact numbers).

It's probably worth noting that the CEO is paid less than the median at similar sized companies. It's always worth keeping an eye on CEO pay, but a more important question is whether the company will grow earnings throughout the years. This free report showing analyst forecasts should help you form a view on Supreme

A Different Perspective

While Supreme shareholders are down 16% for the year (even including dividends), the market itself is up 5.3%. While the aim is to do better than that, it's worth recalling that even great long-term investments sometimes underperform for a year or more. Notably, the loss over the last year isn't as bad as the 34% drop in the last three months. This probably signals that the business has recently disappointed shareholders - it will take time to win them back. It's always interesting to track share price performance over the longer term. But to understand Supreme better, we need to consider many other factors. Even so, be aware that Supreme is showing 1 warning sign in our investment analysis , you should know about...

If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).

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

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.