Investing in Sopheon (LON:SPE) five years ago would have delivered you a 55% gain

While Sopheon plc (LON:SPE) shareholders are probably generally happy, the stock hasn’t had particularly good run recently, with the share price falling 15% in the last quarter. But that doesn’t change the fact that the returns over the last five years have been pleasing. After all, the share price is up a market-beating 52% in that time. While the long term returns are impressive, we do have some sympathy for those who bought more recently, given the 37% drop, in the last year.

So let’s assess the underlying fundamentals over the last 5 years and see if they’ve moved in lock-step with shareholder returns.

Check out our latest analysis for Sopheon

In his essay The Superinvestors of Graham-and-Doddsville Warren Buffett described how share prices do not always rationally reflect the value of a business. 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, Sopheon actually saw its EPS drop 33% per year.

This means it’s unlikely the market is judging the company based on earnings growth. Because earnings per share don’t seem to match up with the share price, we’ll take a look at other metrics instead.

The modest 0.6% dividend yield is unlikely to be propping up the share price. In contrast revenue growth of 5.0% per year is probably viewed as evidence that Sopheon is growing, a real positive. In that case, the company may be sacrificing current earnings per share to drive growth.

You can see below how earnings and revenue have changed over time (discover the exact values by clicking on the image).

earnings-and-revenue-growth

Take a more thorough look at Sopheon’s financial health with this free 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. Arguably, the TSR gives a more comprehensive picture of the return generated by a stock. As it happens, Sopheon’s TSR for the last 5 years was 55%, 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

Investors in Sopheon had a tough year, with a total loss of 36% (including dividends), against a market gain of about 1.1%. Even the share prices of good stocks drop sometimes, but we want to see improvements in the fundamental metrics of a business, before getting too interested. On the bright side, long term shareholders have made money, with a gain of 9% per year over half a decade. It could be that the recent sell-off is an opportunity, so it may be worth checking the fundamental data for signs of a long term growth trend. While it is well worth considering the different impacts that market conditions can have on the share price, there are other factors that are even more important. For instance, we’ve identified 3 warning signs for Sopheon (1 doesn’t sit too well with us) that you should be aware of.

For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.

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

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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.