Pulling back 3.4% this week, POSCO Holdings' KRX:005490) five-year decline in earnings may be coming into investors focus

When we invest, we're generally looking for stocks that outperform the market average. And the truth is, you can make significant gains if you buy good quality businesses at the right price. To wit, the POSCO Holdings share price has climbed 42% in five years, easily topping the market return of 25% (ignoring dividends).

While this past week has detracted from the company's five-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 POSCO Holdings

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).

POSCO Holdings' earnings per share are down 8.6% per year, despite strong share price performance over five years.

Essentially, it doesn't seem likely that investors are focused on EPS. Since the change in EPS doesn't seem to correlate with the change in share price, it's worth taking a look at other metrics.

On the other hand, POSCO Holdings' revenue is growing nicely, at a compound rate of 5.3% over the last five years. It's quite possible that management are prioritizing revenue growth over EPS growth at the moment.

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

POSCO Holdings is well known by investors, and plenty of clever analysts have tried to predict the future profit levels. So it makes a lot of sense to check out what analysts think POSCO Holdings will earn in the future (free analyst consensus estimates)

What About Dividends?

As well as measuring the share price return, investors should also consider the total shareholder return (TSR). The TSR incorporates the value of any spin-offs or discounted capital raisings, along with any dividends, based on the assumption that the dividends are reinvested. So for companies that pay a generous dividend, the TSR is often a lot higher than the share price return. We note that for POSCO Holdings the TSR over the last 5 years was 71%, which is better than the share price return mentioned above. And there's no prize for guessing that the dividend payments largely explain the divergence!

A Different Perspective

We regret to report that POSCO Holdings shareholders are down 35% for the year (even including dividends). Unfortunately, that's worse than the broader market decline of 4.1%. Having said that, it's inevitable that some stocks will be oversold in a falling market. The key is to keep your eyes on the fundamental developments. On the bright side, long term shareholders have made money, with a gain of 11% per year over half a decade. It could be that the recent sell-off is an opportunity, so it may be worth checking the fundamental data for signs of a long term growth trend. While it is well worth considering the different impacts that market conditions can have on the share price, there are other factors that are even more important. For example, we've discovered 2 warning signs for POSCO Holdings that you should be aware of before investing here.

If you would prefer to check out another company -- one with potentially superior financials -- then do not miss this free list of companies that have proven they can grow earnings.

Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on South Korean 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.