Assured Guaranty's (NYSE:AGO) 15% CAGR outpaced the company's earnings growth over the same five-year period

Passive investing in index funds can generate returns that roughly match the overall market. But you can do a lot better than that by buying good quality businesses for attractive prices. For example, the Assured Guaranty Ltd. (NYSE:AGO) share price is up 83% in the last five years, slightly above the market return. Zooming in, the stock is up a respectable 20% in the last year.

Since the stock has added US$190m to its market cap in the past week alone, let's see if underlying performance has been driving long-term returns.

Check out our latest analysis for Assured Guaranty

While markets are a powerful pricing mechanism, share prices reflect investor sentiment, not just underlying business performance. One way to examine how market sentiment has changed over time is to look at the interaction between a company's share price and its earnings per share (EPS).

Over half a decade, Assured Guaranty managed to grow its earnings per share at 33% a year. This EPS growth is higher than the 13% average annual increase in the share price. Therefore, it seems the market has become relatively pessimistic about the company. The reasonably low P/E ratio of 6.26 also suggests market apprehension.

The company's earnings per share (over time) is depicted in the image below (click to see the exact numbers).

It is of course excellent to see how Assured Guaranty has grown profits over the years, but the future is more important for shareholders. Take a more thorough look at Assured Guaranty's financial health with this free report on its balance sheet.

What About Dividends?

As well as measuring the share price return, investors should also consider the total shareholder return (TSR). 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. It's fair to say that the TSR gives a more complete picture for stocks that pay a dividend. We note that for Assured Guaranty the TSR over the last 5 years was 101%, which is better than the share price return mentioned above. This is largely a result of its dividend payments!

A Different Perspective

Assured Guaranty provided a TSR of 22% over the last twelve months. But that return falls short of the market. On the bright side, that's still a gain, and it's actually better than the average return of 15% over half a decade This suggests the company might be improving over time. It's always interesting to track share price performance over the longer term. But to understand Assured Guaranty better, we need to consider many other factors. Consider for instance, the ever-present spectre of investment risk. We've identified 2 warning signs with Assured Guaranty (at least 1 which is potentially serious) , and understanding them should be part of your investment process.

If you are like me, then you will not want to miss this free list of undervalued small caps that insiders are buying.

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.