Earnings are growing at Scales (NZSE:SCL) but shareholders still don't like its prospects

Passive investing in an index fund is a good way to ensure your own returns roughly match the overall market. While individual stocks can be big winners, plenty more fail to generate satisfactory returns. Investors in Scales Corporation Limited (NZSE:SCL) have tasted that bitter downside in the last year, as the share price dropped 32%. That contrasts poorly with the market decline of 0.1%. At least the damage isn't so bad if you look at the last three years, since the stock is down 22% in that time. Shareholders have had an even rougher run lately, with the share price down 27% in the last 90 days.

Given the past week has been tough on shareholders, let's investigate the fundamentals and see what we can learn.

Check out our latest analysis for Scales

In his essay The Superinvestors of Graham-and-Doddsville Warren Buffett described how share prices do not always rationally reflect the value of a business. One imperfect but simple way to consider how the market perception of a company has shifted is to compare the change in the earnings per share (EPS) with the share price movement.

Even though the Scales share price is down over the year, its EPS actually improved. Of course, the situation might betray previous over-optimism about growth.

By glancing at these numbers, we'd posit that the the market had expectations of much higher growth, last year. But looking to other metrics might better explain the share price change.

We don't see any weakness in the Scales' dividend so the steady payout can't really explain the share price drop. From what we can see, revenue is pretty flat, so that doesn't really explain the share price drop. Unless, of course, the market was expecting a revenue uptick.

The graphic below depicts how earnings and revenue have changed over time (unveil the exact values by clicking on the image).

This free interactive report on Scales' balance sheet strength is a great place to start, if you want to investigate the stock further.

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. Arguably, the TSR gives a more comprehensive picture of the return generated by a stock. We note that for Scales the TSR over the last 1 year was -29%, which is better than the share price return mentioned above. This is largely a result of its dividend payments!

A Different Perspective

We regret to report that Scales shareholders are down 29% for the year (even including dividends). Unfortunately, that's worse than the broader market decline of 0.1%. 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. Unfortunately, last year's performance may indicate unresolved challenges, given that it was worse than the annualised loss of 1.2% over the last half decade. We realise that Baron Rothschild has said investors should "buy when there is blood on the streets", but we caution that investors should first be sure they are buying a high quality business. 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 1 warning sign for Scales that you should be aware of before investing here.

If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.

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