Rion (TSE:6823) stock performs better than its underlying earnings growth over last year

On average, over time, stock markets tend to rise higher. This makes investing attractive. But if when you choose to buy stocks, some of them will be below average performers. For example, the Rion Co., Ltd. (TSE:6823), share price is up over the last year, but its gain of 12% trails the market return. The longer term returns have not been as good, with the stock price only 4.0% higher than it was three years ago.

Since the stock has added JP¥3.8b to its market cap in the past week alone, let's see if underlying performance has been driving long-term returns.

View our latest analysis for Rion

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.

Rion was able to grow EPS by 3.1% in the last twelve months. This EPS growth is significantly lower than the 12% increase in the share price. This indicates that the market is now more optimistic about the stock.

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

Before buying or selling a stock, we always recommend a close examination of historic growth trends, available here.

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, Rion's TSR for the last 1 year was 14%, which exceeds the share price return mentioned earlier. The dividends paid by the company have thusly boosted the total shareholder return.

A Different Perspective

Rion shareholders gained a total return of 14% during the year. But that return falls short of the market. The silver lining is that the gain was actually better than the average annual return of 1.2% per year over five year. This suggests the company might be improving over time. It's always interesting to track share price performance over the longer term. But to understand Rion better, we need to consider many other factors. Consider risks, for instance. Every company has them, and we've spotted 1 warning sign for Rion you should know about.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies we expect will 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.