IOL Chemicals and Pharmaceuticals (NSE:IOLCP) shareholders notch a 22% CAGR over 5 years, yet earnings have been shrinking

IOL Chemicals and Pharmaceuticals Limited (NSE:IOLCP) shareholders might be concerned after seeing the share price drop 13% in the last quarter. But that doesn't change the fact that shareholders have received really good returns over the last five years. We think most investors would be happy with the 153% return, over that period. Generally speaking the long term returns will give you a better idea of business quality than short periods can. The more important question is whether the stock is too cheap or too expensive today.

The past week has proven to be lucrative for IOL Chemicals and Pharmaceuticals investors, so let's see if fundamentals drove the company's five-year performance.

See our latest analysis for IOL Chemicals and Pharmaceuticals

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 imperfect but simple way to consider how the market perception of a company has shifted is to compare the change in the earnings per share (EPS) with the share price movement.

IOL Chemicals and Pharmaceuticals' earnings per share are down 23% per year, despite strong share price performance over five years.

This means it's unlikely the market is judging the company based on earnings growth. 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.

The modest 1.2% dividend yield is unlikely to be propping up the share price. In contrast revenue growth of 3.3% per year is probably viewed as evidence that IOL Chemicals and Pharmaceuticals is growing, a real positive. In that case, the company may be sacrificing current earnings per share to drive growth.

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

Balance sheet strength is crucial. It might be well worthwhile taking a look at our free report on how its financial position has changed over time.

What About Dividends?

As well as measuring the share price return, investors should also consider the total shareholder return (TSR). 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. Arguably, the TSR gives a more comprehensive picture of the return generated by a stock. We note that for IOL Chemicals and Pharmaceuticals the TSR over the last 5 years was 168%, which is better than the share price return mentioned above. This is largely a result of its dividend payments!

A Different Perspective

While the broader market gained around 26% in the last year, IOL Chemicals and Pharmaceuticals shareholders lost 5.9% (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 22% per year over half a decade. If the fundamental data continues to indicate long term sustainable growth, the current sell-off could be an opportunity worth considering. It's always interesting to track share price performance over the longer term. But to understand IOL Chemicals and Pharmaceuticals better, we need to consider many other factors. Consider risks, for instance. Every company has them, and we've spotted 2 warning signs for IOL Chemicals and Pharmaceuticals you should know about.

If you are like me, then you will not want to miss this free list of undervalued small caps that insiders are buying.

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.