Daihatsu Diesel Mfg (TSE:6023) sheds 12% this week, as yearly returns fall more in line with earnings growth

It's been a soft week for Daihatsu Diesel Mfg. Co., Ltd. (TSE:6023) shares, which are down 12%. But that doesn't change the fact that the returns over the last three years have been very strong. The share price marched upwards over that time, and is now 281% higher than it was. After a run like that some may not be surprised to see prices moderate. The fundamental business performance will ultimately dictate whether the top is in, or if this is a stellar buying opportunity.

In light of the stock dropping 12% in the past week, we want to investigate the longer term story, and see if fundamentals have been the driver of the company's positive three-year return.

See our latest analysis for Daihatsu Diesel Mfg

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 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.

Daihatsu Diesel Mfg was able to grow its EPS at 46% per year over three years, sending the share price higher. We note that the 56% yearly (average) share price gain isn't too far from the EPS growth rate. Coincidence? Probably not. This suggests that sentiment and expectations have not changed drastically. Quite to the contrary, the share price has arguably reflected the EPS growth.

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

We know that Daihatsu Diesel Mfg has improved its bottom line over the last three years, but what does the future have in store? This free interactive report on Daihatsu Diesel Mfg's balance sheet strength is a great place to start, if you want to investigate the stock further.

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 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. As it happens, Daihatsu Diesel Mfg's TSR for the last 3 years was 328%, 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 good to see that Daihatsu Diesel Mfg has rewarded shareholders with a total shareholder return of 45% in the last twelve months. And that does include the dividend. That's better than the annualised return of 30% over half a decade, implying that the company is doing better recently. Given the share price momentum remains strong, it might be worth taking a closer look at the stock, lest you miss an opportunity. It's always interesting to track share price performance over the longer term. But to understand Daihatsu Diesel Mfg better, we need to consider many other factors. To that end, you should learn about the 2 warning signs we've spotted with Daihatsu Diesel Mfg (including 1 which can't be ignored) .

If you would prefer to check out another company -- one with potentially superior financials -- then do not miss this free list of companies that have proven they can grow earnings.

Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on Japanese 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.