When you buy and hold a stock for the long term, you definitely want it to provide a positive return. But more than that, you probably want to see it rise more than the market average. But Ramsay Health Care Limited (ASX:RHC) has fallen short of that second goal, with a share price rise of 11% over five years, which is below the market return. Zooming in, the stock is up just 4.6% in the last year.
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 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).
Ramsay Health Care's earnings per share are down 6.7% per year, despite strong share price performance over five years.
The strong decline in earnings per share suggests the market isn't using EPS to judge the company. Given that EPS is down, but the share price is up, it seems clear the market is focussed on other aspects of the business, at the moment.
In contrast revenue growth of 10% per year is probably viewed as evidence that Ramsay Health Care is growing, a real positive. In that case, the company may be sacrificing current earnings per share to drive growth.
The company's revenue and earnings (over time) are depicted in the image below (click to see the exact numbers).
We like that insiders have been buying shares in the last twelve months. Even so, future earnings will be far more important to whether current shareholders make money. If you are thinking of buying or selling Ramsay Health Care stock, you should check out this free report showing analyst profit forecasts.
What about the Total Shareholder Return (TSR)?
We'd be remiss not to mention the difference between Ramsay Health Care's total shareholder return (TSR) and its share price return. 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. Ramsay Health Care's TSR of 22% for the 5 years exceeded its share price return, because it has paid dividends.
A Different Perspective
It's nice to see that Ramsay Health Care shareholders have received a total shareholder return of 5.6% over the last year. That gain is better than the annual TSR over five years, which is 4.1%. Therefore it seems like sentiment around the company has been positive lately. In the best case scenario, this may hint at some real business momentum, implying that now could be a great time to delve deeper. 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. For instance, we've identified 4 warning signs for Ramsay Health Care (1 makes us a bit uncomfortable) that you should be aware of.
If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on AU exchanges.
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. 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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