Towa Pharmaceutical's (TSE:4553) 12% CAGR outpaced the company's earnings growth over the same five-year period

The main point of investing for the long term is to make money. Better yet, you'd like to see the share price move up more than the market average. But Towa Pharmaceutical Co., Ltd. (TSE:4553) has fallen short of that second goal, with a share price rise of 57% over five years, which is below the market return. Looking at the last year alone, the stock is up 5.1%.

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

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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 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 five years of share price growth, Towa Pharmaceutical achieved compound earnings per share (EPS) growth of 8.6% per year. So the EPS growth rate is rather close to the annualized share price gain of 9% per year. That suggests that the market sentiment around the company hasn't changed much over that time. In fact, the share price seems to largely reflect the EPS growth.

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

We know that Towa Pharmaceutical has improved its bottom line over the last three years, but what does the future have in store? Take a more thorough look at Towa Pharmaceutical's financial health with this free report on its balance sheet.

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. In the case of Towa Pharmaceutical, it has a TSR of 77% for the last 5 years. That exceeds its share price return that we previously mentioned. This is largely a result of its dividend payments!

A Different Perspective

Towa Pharmaceutical provided a TSR of 8.1% over the last twelve months. But that was short of the market average. On the bright side, the longer term returns (running at about 12% a year, over half a decade) look better. It may well be that this is a business worth popping on the watching, given the continuing positive reception, over time, from the market. It's always interesting to track share price performance over the longer term. But to understand Towa Pharmaceutical better, we need to consider many other factors. Like risks, for instance. Every company has them, and we've spotted 2 warning signs for Towa Pharmaceutical (of which 1 is significant!) you should know about.

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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.