Shareholders 27% loss in SolarWinds (NYSE:SWI) partly attributable to the company's decline in earnings over past five years

For many, the main point of investing is to generate higher returns than the overall market. But every investor is virtually certain to have both over-performing and under-performing stocks. At this point some shareholders may be questioning their investment in SolarWinds Corporation (NYSE:SWI), since the last five years saw the share price fall 67%.

On a more encouraging note the company has added US$72m to its market cap in just the last 7 days, so let's see if we can determine what's driven the five-year loss for shareholders.

Check out our latest analysis for SolarWinds

We don't think that SolarWinds' modest trailing twelve month profit has the market's full attention at the moment. We think revenue is probably a better guide. Generally speaking, we'd consider a stock like this alongside loss-making companies, simply because the quantum of the profit is so low. For shareholders to have confidence a company will grow profits significantly, it must grow revenue.

In the last five years SolarWinds saw its revenue shrink by 3.3% per year. While far from catastrophic that is not good. With neither profit nor revenue growth, the loss of 11% per year doesn't really surprise us. We don't think anyone is rushing to buy this stock. Not that many investors like to invest in companies that are losing money and not growing revenue.

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 SolarWinds has improved its bottom line lately, but what does the future have in store? So it makes a lot of sense to check out what analysts think SolarWinds will earn in the future (free profit forecasts).

What About The Total Shareholder Return (TSR)?

Investors should note that there's a difference between SolarWinds' total shareholder return (TSR) and its share price change, which we've covered above. Arguably the TSR is a more complete return calculation because it accounts for the value of dividends (as if they were reinvested), along with the hypothetical value of any discounted capital that have been offered to shareholders. SolarWinds hasn't been paying dividends, but its TSR of -27% exceeds its share price return of -67%, implying it has either spun-off a business, or raised capital at a discount; thereby providing additional value to shareholders.

A Different Perspective

It's nice to see that SolarWinds shareholders have received a total shareholder return of 25% over the last year. That certainly beats the loss of about 5% per year over the last half decade. The long term loss makes us cautious, but the short term TSR gain certainly hints at a brighter future. While it is well worth considering the different impacts that market conditions can have on the share price, there are other factors that are even more important. Take risks, for example - SolarWinds has 3 warning signs (and 1 which is concerning) we think you should know about.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com