The three-year shareholder returns and company earnings persist lower as Formosa Petrochemical (TWSE:6505) stock falls a further 5.1% in past week

Many investors define successful investing as beating the market average over the long term. But in any portfolio, there are likely to be some stocks that fall short of that benchmark. Unfortunately, that's been the case for longer term Formosa Petrochemical Corporation (TWSE:6505) shareholders, since the share price is down 52% in the last three years, falling well short of the market return of around 51%. The more recent news is of little comfort, with the share price down 39% in a year. The falls have accelerated recently, with the share price down 24% in the last three months.

If the past week is anything to go by, investor sentiment for Formosa Petrochemical isn't positive, so let's see if there's a mismatch between fundamentals and the share price.

View our latest analysis for Formosa Petrochemical

There is no denying that markets are sometimes efficient, but prices do not always reflect underlying business performance. 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 five years of share price growth, Formosa 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.

We note that the dividend seems healthy enough, so that probably doesn't explain the share price drop. We like that Formosa Petrochemical has actually grown its revenue over the last three years. If the company can keep growing revenue, there may be an opportunity for investors. You might have to dig deeper to understand the recent share price weakness.

You can see below how earnings and revenue have changed over time (discover the exact values by clicking on the image).

We know that Formosa Petrochemical has improved its bottom line lately, but what does the future have in store? You can see what analysts are predicting for Formosa Petrochemical in this interactive graph of future profit estimates.

What About Dividends?

When looking at investment returns, it is important to consider the difference between total shareholder return (TSR) and share price return. 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. Arguably, the TSR gives a more comprehensive picture of the return generated by a stock. As it happens, Formosa Petrochemical's TSR for the last 3 years was -48%, which exceeds the share price return mentioned earlier. The dividends paid by the company have thusly boosted the total shareholder return.

A Different Perspective

Formosa Petrochemical shareholders are down 37% for the year (even including dividends), but the market itself is up 42%. Even the share prices of good stocks drop sometimes, but we want to see improvements in the fundamental metrics of a business, before getting too interested. Regrettably, last year's performance caps off a bad run, with the shareholders facing a total loss of 7% per year over five years. Generally speaking long term share price weakness can be a bad sign, though contrarian investors might want to research the stock in hope of a turnaround. 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. Case in point: We've spotted 1 warning sign for Formosa Petrochemical you should be aware of.

But note: Formosa Petrochemical may not be the best stock to buy. So take a peek at this free list of interesting companies with past earnings growth (and further growth forecast).

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.