Despite the downward trend in earnings at Meridian Energy (NZSE:MEL) the stock rallies 3.9%, bringing three-year gains to 47%

One simple way to benefit from the stock market is to buy an index fund. But if you choose individual stocks with prowess, you can make superior returns. Just take a look at Meridian Energy Limited (NZSE:MEL), which is up 31%, over three years, soundly beating the market decline of 1.5% (not including dividends). On the other hand, the returns haven't been quite so good recently, with shareholders up just 0.6%, including dividends.

Since it's been a strong week for Meridian Energy shareholders, let's have a look at trend of the longer term fundamentals.

We've discovered 1 warning sign about Meridian Energy. View them for free.

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. By comparing earnings per share (EPS) and share price changes over time, we can get a feel for how investor attitudes to a company have morphed over time.

During the three years of share price growth, Meridian Energy actually saw its earnings per share (EPS) drop 30% per year.

Thus, it seems unlikely that the market is focussed on EPS growth at the moment. Given this situation, it makes sense to look at other metrics too.

It could be that the revenue growth of 12% per year is viewed as evidence that Meridian Energy is growing. In that case, the company may be sacrificing current earnings per share to drive growth, and maybe shareholder's faith in better days ahead will be rewarded.

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

We know that Meridian Energy has improved its bottom line lately, but what does the future have in store? So it makes a lot of sense to check out what analysts think Meridian Energy will earn in the future (free profit forecasts).

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. It's fair to say that the TSR gives a more complete picture for stocks that pay a dividend. In the case of Meridian Energy, it has a TSR of 47% for the last 3 years. 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

Meridian Energy provided a TSR of 0.6% over the last twelve months. Unfortunately this falls short of the market return. It's probably a good sign that the company has an even better long term track record, having provided shareholders with an annual TSR of 9% over five years. It's quite possible the business continues to execute with prowess, even as the share price gains are slowing. 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 Meridian Energy that you should be aware of before investing here.

If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: many of them are unnoticed AND have attractive valuation).

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