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Does Telefonaktiebolaget LM Ericsson's (STO:ERIC B) Share Price Gain of 63% Match Its Business Performance?

Simply Wall St

One simple way to benefit from the stock market is to buy an index fund. But if you pick the right individual stocks, you could make more than that. For example, the Telefonaktiebolaget LM Ericsson (publ) (STO:ERIC B) share price is up 63% in the last three years, clearly besting the market return of around 19% (not including dividends). On the other hand, the returns haven't been quite so good recently, with shareholders up just 12% , including dividends .

Check out our latest analysis for Telefonaktiebolaget LM Ericsson

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 imperfect but simple way to consider how the market perception of a company has shifted is to compare the change in the earnings per share (EPS) with the share price movement.

We know that Telefonaktiebolaget LM Ericsson has been profitable in the past. However, it made a loss in the last twelve months, suggesting profit may be an unreliable metric at this stage. So we might find other metrics can better explain the share price movements.

The modest 1.2% dividend yield is unlikely to be propping up the share price. You can only imagine how long term shareholders feel about the declining revenue trend (slipping at 0.7% per year). What's clear is that historic earnings and revenue aren't matching up with the share price action, very well. So you might have to dig deeper to get a grasp of the situation

The company's revenue and earnings (over time) are depicted in the image below (click to see the exact numbers).

OM:ERIC B Income Statement, January 20th 2020

It's probably worth noting that the CEO is paid less than the median at similar sized companies. It's always worth keeping an eye on CEO pay, but a more important question is whether the company will grow earnings throughout the years. So we recommend checking out this free report showing consensus forecasts

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. It's fair to say that the TSR gives a more complete picture for stocks that pay a dividend. In the case of Telefonaktiebolaget LM Ericsson, it has a TSR of 71% for the last 3 years. That exceeds its share price return that we previously mentioned. And there's no prize for guessing that the dividend payments largely explain the divergence!

A Different Perspective

Telefonaktiebolaget LM Ericsson shareholders are up 12% for the year (even including dividends) . Unfortunately this falls short of the market return. But at least that's still a gain! Over five years the TSR has been a reduction of 1.1% per year, over five years. It could well be that the business is stabilizing. Most investors take the time to check the data on insider transactions. You can click here to see if insiders have been buying or selling.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies we expect will grow earnings.

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

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.