Sunonwealth Electric Machine Industry's (TWSE:2421) five-year total shareholder returns outpace the underlying earnings growth

While Sunonwealth Electric Machine Industry Co., Ltd. (TWSE:2421) shareholders are probably generally happy, the stock hasn't had particularly good run recently, with the share price falling 15% in the last quarter. But in stark contrast, the returns over the last half decade have impressed. It's fair to say most would be happy with 218% the gain in that time. We think it's more important to dwell on the long term returns than the short term returns. The more important question is whether the stock is too cheap or too expensive today.

In light of the stock dropping 6.3% 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 Sunonwealth Electric Machine Industry

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...' 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.

During five years of share price growth, Sunonwealth Electric Machine Industry achieved compound earnings per share (EPS) growth of 17% per year. This EPS growth is slower than the share price growth of 26% per year, over the same period. 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.

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

Before buying or selling a stock, we always recommend a close examination of historic growth trends, available here.

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. In the case of Sunonwealth Electric Machine Industry, it has a TSR of 281% for the last 5 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

Sunonwealth Electric Machine Industry shareholders gained a total return of 6.8% during the year. But that return falls short of the market. 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 31% over five years. It may well be that this is a business worth popping on the watching, given the continuing positive reception, over time, from the market. 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 instance, we've identified 2 warning signs for Sunonwealth Electric Machine Industry that you should be aware of.

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 Taiwanese 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.

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