The three-year shareholder returns and company earnings persist lower as Italtile (JSE:ITE) stock falls a further 6.1% in past week

For many investors, the main point of stock picking is to generate higher returns than the overall market. But the risk of stock picking is that you will likely buy under-performing companies. We regret to report that long term Italtile Limited (JSE:ITE) shareholders have had that experience, with the share price dropping 23% in three years, versus a market return of about 19%. Even worse, it's down 13% in about a month, which isn't fun at all.

Since Italtile has shed R952m from its value in the past 7 days, let's see if the longer term decline has been driven by the business' economics.

See our latest analysis for Italtile

In his essay The Superinvestors of Graham-and-Doddsville Warren Buffett described how share prices do not always rationally reflect the value of a business. 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 three years that the share price fell, Italtile's earnings per share (EPS) dropped by 4.4% each year. This reduction in EPS is slower than the 8% annual reduction in the share price. So it's likely that the EPS decline has disappointed the market, leaving investors hesitant to buy. The less favorable sentiment is reflected in its current P/E ratio of 10.01.

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

Dive deeper into Italtile's key metrics by checking this interactive graph of Italtile's earnings, revenue and cash flow.

What About Dividends?

When looking at investment returns, it is important to consider the difference between total shareholder return (TSR) and share price return. 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. So for companies that pay a generous dividend, the TSR is often a lot higher than the share price return. We note that for Italtile the TSR over the last 3 years was -6.6%, which is better than the share price return mentioned above. And there's no prize for guessing that the dividend payments largely explain the divergence!

A Different Perspective

Italtile's TSR for the year was broadly in line with the market average, at 17%. That gain looks pretty satisfying, and it is even better than the five-year TSR of 5% per year. It is possible that management foresight will bring growth well into the future, even if the share price slows down. 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. To that end, you should learn about the 3 warning signs we've spotted with Italtile (including 1 which is potentially serious) .

But note: Italtile may not be the best stock to buy. So take a peek at this free list of interesting companies with past earnings growth (and further growth forecast).

Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on South African 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.