Yanbu National Petrochemical (TADAWUL:2290) earnings and shareholder returns have been trending downwards for the last three years, but the stock climbs 4.2% this past week

In order to justify the effort of selecting individual stocks, it's worth striving to beat the returns from a market index fund. But the risk of stock picking is that you will likely buy under-performing companies. We regret to report that long term Yanbu National Petrochemical Company (TADAWUL:2290) shareholders have had that experience, with the share price dropping 49% in three years, versus a market decline of about 9.3%.

On a more encouraging note the company has added ر.س788m to its market cap in just the last 7 days, so let's see if we can determine what's driven the three-year loss for shareholders.

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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 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.

During five years of share price growth, Yanbu National Petrochemical moved from a loss to profitability. That would generally be considered a positive, so we are surprised to see the share price is down. So it's worth looking at other metrics to try to understand the share price move.

It's quite likely that the declining dividend has caused some investors to sell their shares, pushing the price lower in the process. This situation was no doubt compounded by the fact revenue is down 14% per year over three years.

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

We know that Yanbu National Petrochemical has improved its bottom line lately, but what does the future have in store? This free report showing analyst forecasts should help you form a view on Yanbu National Petrochemical

What About Dividends?

It is important to consider the total shareholder return, as well as the share price return, for any given stock. 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. As it happens, Yanbu National Petrochemical's TSR for the last 3 years was -40%, which exceeds the share price return mentioned earlier. And there's no prize for guessing that the dividend payments largely explain the divergence!

A Different Perspective

While the broader market lost about 5.8% in the twelve months, Yanbu National Petrochemical shareholders did even worse, losing 7.1% (even including dividends). 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. Regrettably, last year's performance caps off a bad run, with the shareholders facing a total loss of 1.3% per year over five years. 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. I find it very interesting to look at share price over the long term as a proxy for business performance. But to truly gain insight, we need to consider other information, too. Consider risks, for instance. Every company has them, and we've spotted 1 warning sign for Yanbu National Petrochemical 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 Saudi 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.