Newgen Software Technologies' (NSE:NEWGEN) five-year total shareholder returns outpace the underlying earnings growth

Buying shares in the best businesses can build meaningful wealth for you and your family. While the best companies are hard to find, but they can generate massive returns over long periods. Don't believe it? Then look at the Newgen Software Technologies Limited (NSE:NEWGEN) share price. It's 582% higher than it was five years ago. This just goes to show the value creation that some businesses can achieve. Unfortunately, though, the stock has dropped 5.2% over a week. But this could be related to the soft market, with stocks selling off around 0.02% in the last week. Anyone who held for that rewarding ride would probably be keen to talk about it.

Since the long term performance has been good but there's been a recent pullback of 5.2%, let's check if the fundamentals match the share price.

Check out our latest analysis for Newgen Software Technologies

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).

During five years of share price growth, Newgen Software Technologies achieved compound earnings per share (EPS) growth of 21% per year. This EPS growth is lower than the 47% average annual increase in the share price. This suggests that market participants hold the company in higher regard, these days. And that's hardly shocking given the track record of growth. This favorable sentiment is reflected in its (fairly optimistic) P/E ratio of 53.11.

You can see how EPS has changed over time in the image below (click on the chart to see the exact values).

We know that Newgen Software Technologies has improved its bottom line lately, but is it going to grow revenue? This free report showing analyst revenue forecasts should help you figure out if the EPS growth can be sustained.

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. Arguably, the TSR gives a more comprehensive picture of the return generated by a stock. As it happens, Newgen Software Technologies' TSR for the last 5 years was 611%, which exceeds the share price return mentioned earlier. And there's no prize for guessing that the dividend payments largely explain the divergence!

A Different Perspective

It's nice to see that Newgen Software Technologies shareholders have received a total shareholder return of 144% over the last year. Of course, that includes the dividend. Since the one-year TSR is better than the five-year TSR (the latter coming in at 48% per year), it would seem that the stock's performance has improved in recent times. Someone with an optimistic perspective could view the recent improvement in TSR as indicating that the business itself is getting better with time. 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. Take risks, for example - Newgen Software Technologies has 1 warning sign we think you should be aware of.

Of course Newgen Software Technologies 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.

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