Thermax's (NSE:THERMAX) earnings growth rate lags the 31% CAGR delivered to shareholders

It hasn't been the best quarter for Thermax Limited (NSE:THERMAX) shareholders, since the share price has fallen 22% in that time. But in stark contrast, the returns over the last half decade have impressed. We think most investors would be happy with the 279% return, over that period. We think it's more important to dwell on the long term returns than the short term returns. The more important question is whether the stock is too cheap or too expensive today.

While the stock has fallen 9.4% this week, it's worth focusing on the longer term and seeing if the stocks historical returns have been driven by the underlying fundamentals.

View our latest analysis for Thermax

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 five years of share price growth, Thermax achieved compound earnings per share (EPS) growth of 21% per year. This EPS growth is lower than the 31% average annual increase in the share price. So it's fair to assume the market has a higher opinion of the business than it did five years ago. That's not necessarily surprising considering the five-year track record of earnings growth. This optimism is visible in its fairly high P/E ratio of 61.63.

The image below shows how EPS has tracked over time (if you click on the image you can see greater detail).

It is of course excellent to see how Thermax 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.

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 Thermax the TSR over the last 5 years was 289%, which is better than the share price return mentioned above. And there's no prize for guessing that the dividend payments largely explain the divergence!

A Different Perspective

It's good to see that Thermax has rewarded shareholders with a total shareholder return of 28% in the last twelve months. That's including the dividend. Having said that, the five-year TSR of 31% a year, is even better. It's always interesting to track share price performance over the longer term. But to understand Thermax better, we need to consider many other factors. Take risks, for example - Thermax has 2 warning signs (and 1 which is significant) we think you should know about.

Of course Thermax 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 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.