Earnings are growing at Nippon Shinyaku (TSE:4516) but shareholders still don't like its prospects

In order to justify the effort of selecting individual stocks, it's worth striving to beat the returns from a market index fund. But if you try your hand at stock picking, you risk returning less than the market. We regret to report that long term Nippon Shinyaku Co., Ltd. (TSE:4516) shareholders have had that experience, with the share price dropping 51% in three years, versus a market return of about 55%.

With the stock having lost 3.2% in the past week, it's worth taking a look at business performance and seeing if there's any red flags.

View our latest analysis for Nippon Shinyaku

To paraphrase Benjamin Graham: Over the short term the market is a voting machine, but over the long term it's a weighing machine. 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 the unfortunate three years of share price decline, Nippon Shinyaku actually saw its earnings per share (EPS) improve by 2.5% per year. This is quite a puzzle, and suggests there might be something temporarily buoying the share price. Or else the company was over-hyped in the past, and so its growth has disappointed.

It's pretty reasonable to suspect the market was previously to bullish on the stock, and has since moderated expectations. But it's possible a look at other metrics will be enlightening.

Revenue is actually up 5.0% over the three years, so the share price drop doesn't seem to hinge on revenue, either. This analysis is just perfunctory, but it might be worth researching Nippon Shinyaku more closely, as sometimes stocks fall unfairly. This could present an opportunity.

You can see below how earnings and revenue have changed over time (discover the exact values by clicking on the image).

We know that Nippon Shinyaku has improved its bottom line lately, but what does the future have in store? This free report showing analyst forecasts should help you form a view on Nippon Shinyaku

What About Dividends?

As well as measuring the share price return, investors should also consider the total shareholder return (TSR). 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. Arguably, the TSR gives a more comprehensive picture of the return generated by a stock. As it happens, Nippon Shinyaku's TSR for the last 3 years was -48%, which exceeds the share price return mentioned earlier. The dividends paid by the company have thusly boosted the total shareholder return.

A Different Perspective

While the broader market gained around 2.8% in the last year, Nippon Shinyaku shareholders lost 11% (even including dividends). However, keep in mind that even the best stocks will sometimes underperform the market over a twelve month period. Regrettably, last year's performance caps off a bad run, with the shareholders facing a total loss of 6% per year over five years. Generally speaking long term share price weakness can be a bad sign, though contrarian investors might want to research the stock in hope of a turnaround. 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. Even so, be aware that Nippon Shinyaku is showing 2 warning signs in our investment analysis , and 1 of those can't be ignored...

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.