Ratos (STO:RATO B) delivers shareholders favorable 15% CAGR over 5 years, surging 6.0% in the last week alone

Generally speaking the aim of active stock picking is to find companies that provide returns that are superior to the market average. Buying under-rated businesses is one path to excess returns. For example, the Ratos AB (publ) (STO:RATO B) share price is up 78% in the last 5 years, clearly besting the market return of around 43% (ignoring dividends). However, more recent returns haven't been as impressive as that, with the stock returning just 6.9% in the last year , including dividends .

After a strong gain in the past week, it's worth seeing if longer term returns have been driven by improving fundamentals.

See our latest analysis for Ratos

To quote Buffett, 'Ships will sail around the world but the Flat Earth Society will flourish. There will continue to be wide discrepancies between price and value in the marketplace...' 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 last half decade, Ratos became profitable. That's generally thought to be a genuine positive, so we would expect to see an increasing share price. Since the company was unprofitable five years ago, but not three years ago, it's worth taking a look at the returns in the last three years, too. In fact, the Ratos stock price is 15% lower in the last three years. During the same period, EPS grew by 41% each year. It would appear there's a real mismatch between the increasing EPS and the share price, which has declined -5% a year for three years.

You can see how EPS has changed over time in the image below (click on the chart to see the exact values).

We like that insiders have been buying shares in the last twelve months. Even so, future earnings will be far more important to whether current shareholders make money. This free interactive report on Ratos' earnings, revenue and cash flow 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 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 Ratos the TSR over the last 5 years was 99%, which is better than the share price return mentioned above. The dividends paid by the company have thusly boosted the total shareholder return.

A Different Perspective

We're pleased to report that Ratos shareholders have received a total shareholder return of 6.9% over one year. And that does include the dividend. However, the TSR over five years, coming in at 15% per year, is even more impressive. Potential buyers might understandably feel they've missed the opportunity, but it's always possible business is still firing on all cylinders. 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. Like risks, for instance. Every company has them, and we've spotted 3 warning signs for Ratos (of which 1 shouldn't be ignored!) you should know about.

Ratos is not the only stock insiders are buying. So take a peek at this free list of growing companies with insider buying.

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

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.