Gap (NYSE:GAP) shareholders YoY returns are lagging the company's 620% one-year earnings growth

If you want to compound wealth in the stock market, you can do so by buying an index fund. But you can significantly boost your returns by picking above-average stocks. For example, the The Gap, Inc. (NYSE:GAP) share price is up 71% in the last 1 year, clearly besting the market return of around 39% (not including dividends). So that should have shareholders smiling. Zooming out, the stock is actually down 8.6% in the last three years.

While this past week has detracted from the company's one-year return, let's look at the recent trends of the underlying business and see if the gains have been in alignment.

Check out our latest analysis for Gap

To quote Buffett, 'Ships will sail around the world but the Flat Earth Society will flourish. There will continue to be wide discrepancies between price and value in the marketplace...' 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 last year Gap saw its earnings per share (EPS) increase strongly. While that particular rate of growth is unlikely to be sustained for long, it is still remarkable. We are not surprised the share price is up. Strong growth like this can be evidence of a fundamental inflection point in the business, making it a good time to investigate the stock more closely.

You can see how EPS has changed over time in the image below (click on the chart to see the exact values).

We know that Gap has improved its bottom line lately, but is it going to grow revenue? You could check out this free report showing analyst revenue forecasts.

What About Dividends?

It is important to consider the total shareholder return, as well as the share price return, for any given stock. The TSR incorporates the value of any spin-offs or discounted capital raisings, along with any dividends, based on the assumption that the dividends are reinvested. So for companies that pay a generous dividend, the TSR is often a lot higher than the share price return. As it happens, Gap's TSR for the last 1 year was 76%, which exceeds the share price return mentioned earlier. The dividends paid by the company have thusly boosted the total shareholder return.

A Different Perspective

We're pleased to report that Gap shareholders have received a total shareholder return of 76% over one year. And that does include the dividend. That gain is better than the annual TSR over five years, which is 8%. Therefore it seems like sentiment around the company has been positive lately. Given the share price momentum remains strong, it might be worth taking a closer look at the stock, lest you miss an opportunity. It's always interesting to track share price performance over the longer term. But to understand Gap better, we need to consider many other factors. Consider risks, for instance. Every company has them, and we've spotted 1 warning sign for Gap you should know about.

We will like Gap better if we see some big insider buys. While we wait, check out this free list of undervalued stocks (mostly small caps) with considerable, recent, insider 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.