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Should Magic Software Enterprises (NASDAQ:MGIC) Be Disappointed With Their 29% Profit?

Simply Wall St

If you buy and hold a stock for many years, you'd hope to be making a profit. Furthermore, you'd generally like to see the share price rise faster than the market Unfortunately for shareholders, while the Magic Software Enterprises Ltd. (NASDAQ:MGIC) share price is up 29% in the last five years, that's less than the market return. Looking at the last year alone, the stock is up 7.9%.

Check out our latest analysis for Magic Software Enterprises

While the efficient markets hypothesis continues to be taught by some, it has been proven that markets are over-reactive dynamic systems, and investors are not always rational. 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 five years of share price growth, Magic Software Enterprises actually saw its EPS drop 3.2% per year.

By glancing at these numbers, we'd posit that the decline in earnings per share is not representative of how the business has changed over the years. Since the change in EPS doesn't seem to correlate with the change in share price, it's worth taking a look at other metrics.

On the other hand, Magic Software Enterprises's revenue is growing nicely, at a compound rate of 14% over the last five years. In that case, the company may be sacrificing current earnings per share to drive growth.

The image below shows how earnings and revenue have tracked over time (if you click on the image you can see greater detail).

NasdaqGS:MGIC Income Statement, November 14th 2019

If you are thinking of buying or selling Magic Software Enterprises stock, you should check out this FREE detailed report on its balance sheet.

What About Dividends?

When looking at investment returns, it is important to consider the difference between total shareholder return (TSR) and share price return. 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. Arguably, the TSR gives a more comprehensive picture of the return generated by a stock. As it happens, Magic Software Enterprises's TSR for the last 5 years was 49%, which exceeds the share price return mentioned earlier. The dividends paid by the company have thusly boosted the total shareholder return.

A Different Perspective

Magic Software Enterprises shareholders are up 12% for the year (even including dividends) . Unfortunately this falls short of the market return. On the bright side, that's still a gain, and it's actually better than the average return of 8.3% over half a decade This could indicate that the company is winning over new investors, as it pursues its strategy. Importantly, we haven't analysed Magic Software Enterprises's dividend history. This free visual report on its dividends is a must-read if you're thinking of buying.

We will like Magic Software Enterprises better if we see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.

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

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.

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. Thank you for reading.