HMS Networks' (STO:HMS) earnings growth rate lags the 35% CAGR delivered to shareholders

For many, the main point of investing in the stock market is to achieve spectacular returns. And we've seen some truly amazing gains over the years. To wit, the HMS Networks AB (publ) (STO:HMS) share price has soared 339% over five years. This just goes to show the value creation that some businesses can achieve. In contrast, the stock has fallen 8.9% in the last 30 days.

In light of the stock dropping 4.1% 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.

See our latest analysis for HMS Networks

While markets are a powerful pricing mechanism, share prices reflect investor sentiment, not just underlying business performance. 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, HMS Networks achieved compound earnings per share (EPS) growth of 6.9% per year. This EPS growth is lower than the 34% average annual increase in the share price. This suggests that market participants hold the company in higher regard, these days. That's not necessarily surprising considering the five-year track record of earnings growth. This optimism is visible in its fairly high P/E ratio of 75.72.

The image below shows how EPS has tracked over time (if you click on the image you can see greater detail).

It's probably worth noting we've seen significant insider buying in the last quarter, which we consider a positive. On the other hand, we think the revenue and earnings trends are much more meaningful measures of the business. This free interactive report on HMS Networks' earnings, revenue and cash flow is a great place to start, if you want to investigate the stock further.

What About The Total Shareholder Return (TSR)?

We'd be remiss not to mention the difference between HMS Networks' total shareholder return (TSR) and its 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. HMS Networks' TSR of 353% for the 5 years exceeded its share price return, because it has paid dividends.

A Different Perspective

HMS Networks shareholders are up 3.7% for the year. But that was short of the market average. If we look back over five years, the returns are even better, coming in at 35% per year for five years. Maybe the share price is just taking a breather while the business executes on its growth strategy. 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. For example, we've discovered 2 warning signs for HMS Networks that you should be aware of before investing here.

HMS Networks is not the only stock insiders are buying. So take a peek at this free list of small cap companies at attractive valuations which insiders have been 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.