CEAT (NSE:CEATLTD) shareholders notch a 41% CAGR over 3 years, yet earnings have been shrinking

The worst result, after buying shares in a company (assuming no leverage), would be if you lose all the money you put in. But if you buy shares in a really great company, you can more than double your money. To wit, the CEAT Limited (NSE:CEATLTD) share price has flown 175% in the last three years. Most would be happy with that. It's also good to see the share price up 73% over the last quarter. This could be related to the recent financial results, released recently - you can catch up on the most recent data by reading our company report.

The past week has proven to be lucrative for CEAT investors, so let's see if fundamentals drove the company's three-year performance.

Check out our latest analysis for CEAT

While the efficient markets hypothesis continues to be taught by some, it has been proven that markets are over-reactive dynamic systems, and investors are not always rational. 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 the last three years, CEAT failed to grow earnings per share, which fell 7.0% (annualized).

So we doubt that the market is looking to EPS for its main judge of the company's value. Since the change in EPS doesn't seem to correlate with the change in share price, it's worth taking a look at other metrics.

Languishing at just 0.5%, we doubt the dividend is doing much to prop up the share price. It could be that the revenue growth of 21% per year is viewed as evidence that CEAT is growing. In that case, the company may be sacrificing current earnings per share to drive growth, and maybe shareholder's faith in better days ahead will be rewarded.

You can see below how earnings and revenue have changed over time (discover the exact values by clicking on the image).

CEAT is well known by investors, and plenty of clever analysts have tried to predict the future profit levels. You can see what analysts are predicting for CEAT in this interactive graph of future profit estimates.

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 is a return calculation that accounts for the value of cash dividends (assuming that any dividend received was reinvested) and the calculated value of any discounted capital raisings and spin-offs. It's fair to say that the TSR gives a more complete picture for stocks that pay a dividend. We note that for CEAT the TSR over the last 3 years was 181%, 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 CEAT shareholders have received a total shareholder return of 123% over one year. And that does include the dividend. That's better than the annualised return of 15% over half a decade, implying that the company is doing better recently. In the best case scenario, this may hint at some real business momentum, implying that now could be a great time to delve deeper. It's always interesting to track share price performance over the longer term. But to understand CEAT better, we need to consider many other factors. Like risks, for instance. Every company has them, and we've spotted 3 warning signs for CEAT (of which 1 is a bit concerning!) 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 Indian 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.