Ebara's (TSE:6361) five-year earnings growth trails the 43% YoY shareholder returns

For many, the main point of investing in the stock market is to achieve spectacular returns. While not every stock performs well, when investors win, they can win big. Just think about the savvy investors who held Ebara Corporation (TSE:6361) shares for the last five years, while they gained 423%. And this is just one example of the epic gains achieved by some long term investors. And in the last month, the share price has gained 23%. But this could be related to good market conditions -- stocks in its market are up 11% in the last month.

After a strong gain in the past week, it's worth seeing if longer term returns have been driven by improving fundamentals.

We've discovered 2 warning signs about Ebara. View them for free.

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.

During five years of share price growth, Ebara achieved compound earnings per share (EPS) growth of 26% per year. This EPS growth is lower than the 39% 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. And that's hardly shocking given the track record of 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 Ebara has improved its bottom line lately, but is it going to grow revenue? You could check out this free report showing analyst revenue forecasts.

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. It's fair to say that the TSR gives a more complete picture for stocks that pay a dividend. In the case of Ebara, it has a TSR of 505% for the last 5 years. That exceeds its share price return that we previously mentioned. The dividends paid by the company have thusly boosted the total shareholder return.

A Different Perspective

Ebara shareholders are down 4.2% for the year (even including dividends), but the market itself is up 3.6%. However, keep in mind that even the best stocks will sometimes underperform the market over a twelve month period. Longer term investors wouldn't be so upset, since they would have made 43%, each year, over five years. If the fundamental data continues to indicate long term sustainable growth, the current sell-off could be an opportunity worth considering. 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. For instance, we've identified 2 warning signs for Ebara that you should be aware of.

We will like Ebara better if we see some big insider buys. While we wait, check out this free list of undervalued stocks (mostly small caps) with considerable, recent, insider buying.

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.