One simple way to benefit from the stock market is to buy an index fund. But if you choose individual stocks with prowess, you can make superior returns. For example, the FinVolution Group (NYSE:FINV) share price is up 48% in the last three years, clearly besting the market return of around 22% (not including dividends).
In light of the stock dropping 4.5% in the past week, we want to investigate the longer term story, and see if fundamentals have been the driver of the company's positive three-year return.
While markets are a powerful pricing mechanism, share prices reflect investor sentiment, not just underlying business performance. 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 three years of share price growth, FinVolution Group actually saw its earnings per share (EPS) drop 3.1% per year.
Given the share price resilience, we don't think the (declining) EPS numbers are a good measure of how the business is moving forward, right now. 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.
It could be that the revenue growth of 20% per year is viewed as evidence that FinVolution Group is growing. In that case, the company may be sacrificing current earnings per share to drive growth, and maybe shareholder's faith in better days ahead will be rewarded.
You can see below how earnings and revenue have changed over time (discover the exact values by clicking on the image).
If you are thinking of buying or selling FinVolution Group stock, you should check out this FREE detailed report on its balance sheet.
What About Dividends?
It is important to consider the total shareholder return, as well as the share price return, for any given stock. 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. We note that for FinVolution Group the TSR over the last 3 years was 69%, which is better than the share price return mentioned above. The dividends paid by the company have thusly boosted the total shareholder return.
A Different Perspective
FinVolution Group shareholders are down 23% over twelve months (even including dividends), which isn't far from the market return of -22%. Looking back further paints a different picture, with the stock returning 19% per year over three years. One might wonder whether the recent sell-off could be an opportunity. It might be worth investigating the quality of the business. It's always interesting to track share price performance over the longer term. But to understand FinVolution Group better, we need to consider many other factors. Like risks, for instance. Every company has them, and we've spotted 2 warning signs for FinVolution Group (of which 1 is a bit unpleasant!) you should know about.
If you would prefer to check out another company -- one with potentially superior financials -- then do not miss this free list of companies that have proven they can grow earnings.
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on US 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.
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