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Fairfax Financial Holdings' (TSE:FFH) 1,887% YoY earnings expansion surpassed the shareholder returns over the past year

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·3 min read
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Passive investing in index funds can generate returns that roughly match the overall market. But you can significantly boost your returns by picking above-average stocks. To wit, the Fairfax Financial Holdings Limited (TSE:FFH) share price is 29% higher than it was a year ago, much better than the market return of around 18% (not including dividends) in the same period. That's a solid performance by our standards! The longer term returns have not been as good, with the stock price only 1.2% higher than it was three years ago.

Since it's been a strong week for Fairfax Financial Holdings shareholders, let's have a look at trend of the longer term fundamentals.

View our latest analysis for Fairfax Financial Holdings

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...' One way to examine how market sentiment has changed over time is to look at the interaction between a company's share price and its earnings per share (EPS).

During the last year Fairfax Financial Holdings 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. So we'd expect to see the share price higher. 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.

The image below shows how EPS has tracked over time (if you click on the image you can see greater detail).

earnings-per-share-growth
earnings-per-share-growth

We consider it positive that insiders have made significant purchases in the last year. Having said that, most people consider earnings and revenue growth trends to be a more meaningful guide to the business. Dive deeper into the earnings by checking this interactive graph of Fairfax Financial Holdings' earnings, revenue and cash flow.

What About Dividends?

As well as measuring the share price return, investors should also consider the total shareholder return (TSR). Whereas the share price return only reflects the change in the share price, the TSR includes the value of dividends (assuming they were reinvested) and the benefit of any discounted capital raising or spin-off. It's fair to say that the TSR gives a more complete picture for stocks that pay a dividend. As it happens, Fairfax Financial Holdings' TSR for the last 1 year was 31%, which exceeds the share price return mentioned earlier. And there's no prize for guessing that the dividend payments largely explain the divergence!

A Different Perspective

It's good to see that Fairfax Financial Holdings has rewarded shareholders with a total shareholder return of 31% in the last twelve months. Of course, that includes the dividend. That gain is better than the annual TSR over five years, which is 4%. 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 Fairfax Financial Holdings better, we need to consider many other factors. Consider for instance, the ever-present spectre of investment risk. We've identified 3 warning signs with Fairfax Financial Holdings (at least 1 which is concerning) , and understanding them should be part of your investment process.

If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).

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