Investors more bullish on Toho Chemical Industry Company (TSE:4409) this week as stock rallies 25%, despite earnings trending downwards over past three years

Low-cost index funds make it easy to achieve average market returns. But across the board there are plenty of stocks that underperform the market. For example, the Toho Chemical Industry Company, Limited (TSE:4409) share price return of 32% over three years lags the market return in the same period. Some buyers are laughing, though, with an increase of 31% in the last year.

On the back of a solid 7-day performance, let's check what role the company's fundamentals have played in driving long term shareholder returns.

Check out our latest analysis for Toho Chemical Industry Company

To quote Buffett, 'Ships will sail around the world but the Flat Earth Society will flourish. There will continue to be wide discrepancies between price and value in the marketplace...' By comparing earnings per share (EPS) and share price changes over time, we can get a feel for how investor attitudes to a company have morphed over time.

Over the last three years, Toho Chemical Industry Company failed to grow earnings per share, which fell 18% (annualized).

So we doubt that the market is looking to EPS for its main judge of the company's value. Therefore, we think it's worth considering other metrics as well.

It could be that the revenue growth of 7.2% per year is viewed as evidence that Toho Chemical Industry Company is growing. If the company is being managed for the long term good, today's shareholders might be right to hold on.

The image below shows how earnings and revenue have tracked over time (if you click on the image you can see greater detail).

Take a more thorough look at Toho Chemical Industry Company's financial health with this free report on its balance sheet.

What About Dividends?

When looking at investment returns, it is important to consider the difference between total shareholder return (TSR) and share price return. 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. So for companies that pay a generous dividend, the TSR is often a lot higher than the share price return. As it happens, Toho Chemical Industry Company's TSR for the last 3 years was 45%, which exceeds the share price return mentioned earlier. This is largely a result of its dividend payments!

A Different Perspective

It's nice to see that Toho Chemical Industry Company shareholders have received a total shareholder return of 35% 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 8% 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. Like risks, for instance. Every company has them, and we've spotted 4 warning signs for Toho Chemical Industry Company (of which 2 are potentially serious!) you should know about.

We will like Toho Chemical Industry Company 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.

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

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