As Afya (NASDAQ:AFYA) lifts 3.8% this past week, investors may now be noticing the company's five-year earnings growth

Explore Afya's Fair Values from the Community and select yours

Ideally, your overall portfolio should beat the market average. But even the best stock picker will only win with some selections. So we wouldn't blame long term Afya Limited (NASDAQ:AFYA) shareholders for doubting their decision to hold, with the stock down 37% over a half decade. The falls have accelerated recently, with the share price down 21% in the last three months. We note that the company has reported results fairly recently; and the market is hardly delighted. You can check out the latest numbers in our company report.

Although the past week has been more reassuring for shareholders, they're still in the red over the last five years, so let's see if the underlying business has been responsible for the decline.

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While markets are a powerful pricing mechanism, share prices reflect investor sentiment, not just 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.

During the unfortunate half decade during which the share price slipped, Afya actually saw its earnings per share (EPS) improve by 22% per year. Given the share price reaction, one might suspect that EPS is not a good guide to the business performance during the period (perhaps due to a one-off loss or gain). Alternatively, growth expectations may have been unreasonable in the past.

Because of the sharp contrast between the EPS growth rate and the share price growth, we're inclined to look to other metrics to understand the changing market sentiment around the stock.

We don't think that the 1.5% is big factor in the share price, since it's quite small, as dividends go. Revenue is actually up 23% over the time period. So it seems one might have to take closer look at the fundamentals to understand why the share price languishes. After all, there may be an opportunity.

You can see how earnings and revenue have changed over time in the image below (click on the chart to see the exact values).

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

A Different Perspective

Investors in Afya had a tough year, with a total loss of 17% (including dividends), against a market gain of about 19%. 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. Unfortunately, last year's performance may indicate unresolved challenges, given that it was worse than the annualised loss of 6% over the last half decade. We realise that Baron Rothschild has said investors should "buy when there is blood on the streets", but we caution that investors should first be sure they are buying a high quality business. Is Afya cheap compared to other companies? These 3 valuation measures might help you decide.

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 American 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.