Formula Systems (1985)'s (TLV:FORTY) earnings growth rate lags the 9.5% CAGR delivered to shareholders

When we invest, we're generally looking for stocks that outperform the market average. Buying under-rated businesses is one path to excess returns. For example, long term Formula Systems (1985) Ltd. (TLV:FORTY) shareholders have enjoyed a 47% share price rise over the last half decade, well in excess of the market return of around 15% (not including dividends). On the other hand, the more recent gains haven't been so impressive, with shareholders gaining just 11%, including dividends.

While this past week has detracted from the company's five-year return, let's look at the recent trends of the underlying business and see if the gains have been in alignment.

See our latest analysis for Formula Systems (1985)

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 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).

Over half a decade, Formula Systems (1985) managed to grow its earnings per share at 12% a year. The EPS growth is more impressive than the yearly share price gain of 8% over the same period. So it seems the market isn't so enthusiastic about the stock these days.

You can see below how EPS has changed over time (discover the exact values by clicking on the image).

It might be well worthwhile taking a look at our free report on Formula Systems (1985)'s earnings, revenue and cash flow.

What About Dividends?

It is important to consider the total shareholder return, as well as the share price return, for any given stock. 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. We note that for Formula Systems (1985) the TSR over the last 5 years was 58%, which is better than the share price return mentioned above. The dividends paid by the company have thusly boosted the total shareholder return.

A Different Perspective

We're pleased to report that Formula Systems (1985) shareholders have received a total shareholder return of 11% over one year. Of course, that includes the dividend. That gain is better than the annual TSR over five years, which is 10%. Therefore it seems like sentiment around the company has been positive lately. Someone with an optimistic perspective could view the recent improvement in TSR as indicating that the business itself is getting better with time. Before deciding if you like the current share price, check how Formula Systems (1985) scores on these 3 valuation metrics.

But note: Formula Systems (1985) 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 Israeli 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.

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