L&T Finance's (NSE:LTF) earnings growth rate lags the 26% CAGR delivered to shareholders

By buying an index fund, you can roughly match the market return with ease. But if you buy good businesses at attractive prices, your portfolio returns could exceed the average market return. For example, L&T Finance Limited (NSE:LTF) shareholders have seen the share price rise 94% over three years, well in excess of the market return (42%, not including dividends).

Since the long term performance has been good but there's been a recent pullback of 7.8%, let's check if the fundamentals match the share price.

View our latest analysis for L&T Finance

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. By comparing earnings per share (EPS) and share price changes over time, we can get a feel for how investor attitudes to a company have morphed over time.

L&T Finance was able to grow its EPS at 38% per year over three years, sending the share price higher. The average annual share price increase of 25% is actually lower than the EPS growth. Therefore, it seems the market has moderated its expectations for growth, somewhat.

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

It's probably worth noting that the CEO is paid less than the median at similar sized companies. But while CEO remuneration is always worth checking, the really important question is whether the company can grow earnings going forward. Dive deeper into the earnings by checking this interactive graph of L&T Finance's earnings, revenue and cash flow.

What About Dividends?

When looking at investment returns, it is important to consider the difference between total shareholder return (TSR) and share price return. 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. Arguably, the TSR gives a more comprehensive picture of the return generated by a stock. We note that for L&T Finance the TSR over the last 3 years was 102%, 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

While the broader market gained around 0.4% in the last year, L&T Finance shareholders lost 21% (even including dividends). However, keep in mind that even the best stocks will sometimes underperform the market over a twelve month period. On the bright side, long term shareholders have made money, with a gain of 5% per year over half a decade. It could be that the recent sell-off is an opportunity, so it may be worth checking the fundamental data for signs of a long term growth trend. I find it very interesting to look at share price over the long term as a proxy for business performance. But to truly gain insight, we need to consider other information, too. To that end, you should learn about the 2 warning signs we've spotted with L&T Finance (including 1 which is a bit concerning) .

Of course L&T Finance 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.