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Volatility 101: Should Telit Communications (LON:TCM) Shares Have Dropped 22%?

Simply Wall St

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While not a mind-blowing move, it is good to see that the Telit Communications PLC (LON:TCM) share price has gained 18% in the last three months. But that doesn't change the fact that the returns over the last three years have been less than pleasing. In fact, the share price is down 22% in the last three years, falling well short of the market return.

View our latest analysis for Telit Communications

Telit Communications isn't a profitable company, so it is unlikely we'll see a strong correlation between its share price and its earnings per share (EPS). Arguably revenue is our next best option. Generally speaking, companies without profits are expected to grow revenue every year, and at a good clip. That's because it's hard to be confident a company will be sustainable if revenue growth is negligible, and it never makes a profit.

In the last three years, Telit Communications saw its revenue grow by 7.4% per year, compound. Given it's losing money in pursuit of growth, we are not really impressed with that. The stock dropped 8.1% during that time. If revenue growth accelerates, we might see the share price bounce. But the real upside for shareholders will be if the company can start generating profits.

The chart below shows how revenue and earnings have changed with time, (if you click on the chart you can see the actual values).

AIM:TCM Income Statement, June 18th 2019

It's good to see that there was some significant insider buying in the last three months. That's a positive. That said, we think earnings and revenue growth trends are even more important factors to consider. You can see what analysts are predicting for Telit Communications in this interactive graph of future profit estimates.

What about the Total Shareholder Return (TSR)?

We've already covered Telit Communications's share price action, but we should also mention its 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. Telit Communications's TSR of was a loss of 21% for the 3 years. That wasn't as bad as its share price return, because it has paid dividends.

A Different Perspective

We're pleased to report that Telit Communications shareholders have received a total shareholder return of 8.2% over one year. Notably the five-year annualised TSR loss of 4.1% per year compares very unfavourably with the recent share price performance. We generally put more weight on the long term performance over the short term, but the recent improvement could hint at a (positive) inflection point within the business. It is all well and good that insiders have been buying shares, but we suggest you check here to see what price insiders were buying at.

There are plenty of other companies that have insiders buying up shares. You probably do not want to miss this free list of growing companies that insiders are buying.

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