When buying shares in a company, it’s worth keeping in mind the possibility that it will fail and you could lose money. But on the bright side, you can earn much more than 100% on really good stocks. For example, the Tech Mahindra Limited (NSE:TECHM) share price has risen 121% in the last half decade. Most would be very happy about that. It has fallen by 3.2% in the last seven days.
Since the long-term performance has been good, but there has been a recent pullback of 3.2%, let’s check if the fundamentals match the share price.
Though if you’re not interested in digging into what was driving TECHM’s performance, we have free a list of interesting investment ideas that could potentially inspire your next investment!
To paraphrase Benjamin Graham: In the short term the market is a voting machine, but in the long term it is a weighing machine. One flawed but reasonable way to gauge how sentiment around a company has changed is to compare earnings per share (EPS) to the stock price.
During the five years of share price growth, Tech Mahindra has posted compounded earnings per share (EPS) of 13% per annum. This EPS growth is less than the average annual stock price increase of 17 percent. So it’s fair to assume that the market has a higher opinion of the business than it did five years ago. That’s not necessarily surprising given the five-year track record of earnings growth.
Below you can see how EPS has changed over time (click on the image to find out the exact values).
We know that Tech Mahindra has improved its bottom line lately, but will it increase revenue? If you are interested, you can check this out free report showing consensus revenue forecasts.
What about dividends?
In addition to measuring stock price returns, investors should also consider total shareholder return (TSR). While the share price return reflects only the change in share price, TSR includes the value of dividends (assuming they are reinvested) and the benefit of any discounted capital raising or deployment. Arguably, TSR gives a more comprehensive picture of the returns generated by a stock. As it happens, Tech Mahindra’s TSR over the past 5 years has been 156%, which exceeds the share price return mentioned earlier. Dividends paid by the company thus increased in total shareholder return.
A different perspective
While the broader market has gained about 0.4% in the past year, Tech Mahindra shareholders have lost 25% (even including dividends). However, keep in mind that even the best stocks will sometimes underperform the market over a twelve-month period. Long-term investors wouldn’t be so upset, as they would make 21% every year, for five years. It’s possible that the recent selloff is an opportunity, so it might be worth checking the fundamentals for signs of a longer-term uptrend. I find it very interesting to look at stock price over the long term as a proxy for business performance. But to really gain insight, we need to consider other information. For example, we discovered 1 warning sign for Tech Mahindra you should be aware of that before investing here.
For those who like to find profitable investments this free a list of growing companies with recent insider buys, could be just the ticket.
Note that the market returns listed in this article reflect the market-weighted average returns of stocks currently trading on IN exchanges.
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This Simply Wall St article 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 into account your goals or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Simpli Wall St has no position in any of the stocks mentioned.