Gunze's (TSE:3002) five-year earnings growth trails the 21% YoY shareholder returns
Gunze Limited (TSE:3002) has seen its share price increase by 113% over the past five years, with a recent 53% rise in just a quarter. However, its earnings per share (EPS) grew at a slower rate of 9.6% annually during the same period. The total shareholder return (TSR) over five years stands at 160%, indicating that dividends have significantly contributed to returns. Recently, shareholders enjoyed a 71% TSR over the past year, suggesting improved stock performance. Despite this, there are two warning signs to consider regarding the company's future.
Explore Gunze's Fair Values from the Community and select yours
When you buy a stock there is always a possibility that it could drop 100%. But on the bright side, if you buy shares in a high quality company at the right price, you can gain well over 100%. For example, the Gunze Limited (TSE:3002) share price has soared 113% in the last half decade. Most would be very happy with that. On top of that, the share price is up 53% in about a quarter.
Since the stock has added JP¥7.6b to its market cap in the past week alone, let's see if underlying performance has been driving long-term returns.
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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).
Over half a decade, Gunze managed to grow its earnings per share at 9.6% a year. This EPS growth is lower than the 16% average annual increase in the share price. This suggests that market participants hold the company in higher regard, these days. That's not necessarily surprising considering the five-year track record of earnings growth.
The image below shows how EPS has tracked over time (if you click on the image you can see greater detail).
We know that Gunze has improved its bottom line over the last three years, but what does the future have in store? If you are thinking of buying or selling Gunze 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. The TSR incorporates the value of any spin-offs or discounted capital raisings, along with any dividends, based on the assumption that the dividends are reinvested. Arguably, the TSR gives a more comprehensive picture of the return generated by a stock. In the case of Gunze, it has a TSR of 160% for the last 5 years. That exceeds its share price return that we previously mentioned. The dividends paid by the company have thusly boosted the total shareholder return.
A Different Perspective
It's nice to see that Gunze shareholders have received a total shareholder return of 71% over the last year. And that does include the dividend. Since the one-year TSR is better than the five-year TSR (the latter coming in at 21% per year), it would seem that the stock's performance has improved in recent times. Given the share price momentum remains strong, it might be worth taking a closer look at the stock, lest you miss an opportunity. I find it very interesting to look at share price over the long term as a proxy for business performance. But to truly gain insight, we need to consider other information, too. Case in point: We've spotted 2 warning signs for Gunze you should be aware of, and 1 of them is concerning.
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 Japanese exchanges.
