Towa Pharmaceutical's (TSE:4553) underlying earnings growth outpaced the return generated for shareholders over the past year

Passive investing in index funds can generate returns that roughly match the overall market. But one can do better than that by picking better than average stocks (as part of a diversified portfolio). For example, the Towa Pharmaceutical Co., Ltd. (TSE:4553) share price is up 20% in the last 1 year, clearly besting the market return of around 6.3% (not including dividends). So that should have shareholders smiling. Looking back further, the share price is 17% higher than it was three years ago.

While this past week has detracted from the company's one-year return, let's look at the recent trends of the underlying business and see if the gains have been in alignment.

See our latest analysis for Towa Pharmaceutical

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).

Towa Pharmaceutical was able to grow EPS by 144% in the last twelve months. It's fair to say that the share price gain of 20% did not keep pace with the EPS growth. So it seems like the market has cooled on Towa Pharmaceutical, despite the growth. Interesting. This cautious sentiment is reflected in its (fairly low) P/E ratio of 9.83.

The image below shows how EPS has tracked over time (if you click on the image you can see greater detail).

We know that Towa Pharmaceutical has improved its bottom line lately, but is it going to grow revenue? This free report showing analyst revenue forecasts should help you figure out if the EPS growth can be sustained.

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 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. It's fair to say that the TSR gives a more complete picture for stocks that pay a dividend. In the case of Towa Pharmaceutical, it has a TSR of 22% for the last 1 year. 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

We're pleased to report that Towa Pharmaceutical shareholders have received a total shareholder return of 22% over one year. That's including the dividend. Since the one-year TSR is better than the five-year TSR (the latter coming in at 5% 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. 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. Even so, be aware that Towa Pharmaceutical is showing 2 warning signs in our investment analysis , and 1 of those is concerning...

We will like Towa Pharmaceutical 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.