Optimism for First American Financial (NYSE:FAF) has grown this past week, despite five-year decline in earnings

The main point of investing for the long term is to make money. But more than that, you probably want to see it rise more than the market average. Unfortunately for shareholders, while the First American Financial Corporation (NYSE:FAF) share price is up 22% in the last five years, that's less than the market return. Looking at the last year alone, the stock is up 7.2%.

After a strong gain in the past week, it's worth seeing if longer term returns have been driven by improving fundamentals.

View our latest analysis for First American Financial

To paraphrase Benjamin Graham: Over the short term the market is a voting machine, but over the long term it's a weighing machine. 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.

First American Financial's earnings per share are down 16% per year, despite strong share price performance over five years.

Since the EPS are down strongly, it seems highly unlikely market participants are looking at EPS to value the company. The falling EPS doesn't correlate with the climbing share price, so it's worth taking a look at other metrics.

In contrast revenue growth of 6.5% per year is probably viewed as evidence that First American Financial is growing, a real positive. It's quite possible that management are prioritizing revenue growth over EPS growth at the moment.

The graphic below depicts how earnings and revenue have changed over time (unveil the exact values by clicking on the image).

Balance sheet strength is crucial. It might be well worthwhile taking a look at our free report on how its financial position has changed over time.

What About Dividends?

As well as measuring the share price return, investors should also consider the total shareholder return (TSR). The TSR is a return calculation that accounts for the value of cash dividends (assuming that any dividend received was reinvested) and the calculated value of any discounted capital raisings and spin-offs. Arguably, the TSR gives a more comprehensive picture of the return generated by a stock. As it happens, First American Financial's TSR for the last 5 years was 44%, which exceeds the share price return mentioned earlier. And there's no prize for guessing that the dividend payments largely explain the divergence!

A Different Perspective

First American Financial shareholders are up 11% for the year (even including dividends). But that was short of the market average. The silver lining is that the gain was actually better than the average annual return of 8% per year over five year. This could indicate that the company is winning over new investors, as it pursues its strategy. 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 First American Financial that you should be aware of.

For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.

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.