AddLife's (STO:ALIF B) five-year total shareholder returns outpace the underlying earnings growth

AddLife AB (publ) (STO:ALIF B) shareholders might be concerned after seeing the share price drop 15% in the last month. But at least the stock is up over the last five years. However we are not very impressed because the share price is only up 61%, less than the market return of 76%. Unfortunately not all shareholders will have held it for five years, so spare a thought for those caught in the 44% decline over the last three years: that's a long time to wait for profits.

In light of the stock dropping 6.6% in the past week, we want to investigate the longer term story, and see if fundamentals have been the driver of the company's positive five-year return.

View our latest analysis for AddLife

There is no denying that markets are sometimes efficient, but prices do not always reflect underlying business performance. One flawed but reasonable way to assess how sentiment around a company has changed is to compare the earnings per share (EPS) with the share price.

Over half a decade, AddLife managed to grow its earnings per share at 3.1% a year. This EPS growth is lower than the 10% average annual increase in the share price. So it's fair to assume the market has a higher opinion of the business than it did five years ago. And that's hardly shocking given the track record of growth. This optimism is visible in its fairly high P/E ratio of 60.83.

You can see below how EPS has changed over time (discover the exact values by clicking on the image).

We consider it positive that insiders have made significant purchases in the last year. Having said that, most people consider earnings and revenue growth trends to be a more meaningful guide to the business. Before buying or selling a stock, we always recommend a close examination of historic growth trends, available here..

What About Dividends?

As well as measuring the share price return, investors should also consider the total shareholder return (TSR). 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. So for companies that pay a generous dividend, the TSR is often a lot higher than the share price return. As it happens, AddLife's TSR for the last 5 years was 68%, which exceeds the share price return mentioned earlier. This is largely a result of its dividend payments!

A Different Perspective

Investors in AddLife had a tough year, with a total loss of 13% (including dividends), against a market gain of about 8.6%. However, keep in mind that even the best stocks will sometimes underperform the market over a twelve month period. Longer term investors wouldn't be so upset, since they would have made 11%, each year, over five years. If the fundamental data continues to indicate long term sustainable growth, the current sell-off could be an opportunity worth considering. 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. Take risks, for example - AddLife has 2 warning signs (and 1 which is a bit unpleasant) we think you should know about.

There are plenty of other companies that have insiders buying up shares. You probably do 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 Swedish 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.