Optimism for Formosa Oilseed Processing (TWSE:1225) has grown this past week, despite three-year decline in earnings

For us, stock picking is in large part the hunt for the truly magnificent stocks. Not every pick can be a winner, but when you pick the right stock, you can win big. Take, for example, the Formosa Oilseed Processing Co., Ltd. (TWSE:1225) share price, which skyrocketed 339% over three years. Also pleasing for shareholders was the 93% gain in the last three months.

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 Formosa Oilseed Processing

While the efficient markets hypothesis continues to be taught by some, it has been proven that markets are over-reactive dynamic systems, and investors are not always rational. 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 three years of share price growth, Formosa Oilseed Processing actually saw its earnings per share (EPS) drop 4.3% per year.

Given the share price resilience, we don't think the (declining) EPS numbers are a good measure of how the business is moving forward, right now. Therefore, it makes sense to look into other metrics.

The modest 0.8% dividend yield is unlikely to be propping up the share price. It could be that the revenue growth of 5.5% per year is viewed as evidence that Formosa Oilseed Processing is growing. In that case, the company may be sacrificing current earnings per share to drive growth, and maybe shareholder's faith in better days ahead will be rewarded.

The company's revenue and earnings (over time) are depicted in the image below (click to see the exact numbers).

This free interactive report on Formosa Oilseed Processing's balance sheet strength is a great place to start, if you want to investigate the stock further.

What About Dividends?

It is important to consider the total shareholder return, as well as the share price return, for any given stock. 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. We note that for Formosa Oilseed Processing the TSR over the last 3 years was 369%, 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

It's nice to see that Formosa Oilseed Processing shareholders have received a total shareholder return of 240% over the last year. Of course, that includes the dividend. That's better than the annualised return of 37% over half a decade, implying that the company is doing better recently. In the best case scenario, this may hint at some real business momentum, implying that now could be a great time to delve deeper. It's always interesting to track share price performance over the longer term. But to understand Formosa Oilseed Processing better, we need to consider many other factors. Like risks, for instance. Every company has them, and we've spotted 2 warning signs for Formosa Oilseed Processing (of which 1 makes us a bit uncomfortable!) you should know about.

Of course Formosa Oilseed Processing may not be the best stock to buy. So you may wish to see this free collection of growth stocks.

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.