If you want to compound wealth in the stock market, you can do so by buying an index fund. But the truth is, you can make significant gains if you buy good quality businesses at the right price. For example, the FirstRand Limited (JSE:FSR) share price is 71% higher than it was five years ago, which is more than the market average. Over the last year the stock price is up, albeit only a modest 2.0%.

With that in mind, it’s worth seeing if the company’s underlying fundamentals have been the driver of long term performance, or if there are some discrepancies.

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There is no denying that markets are sometimes efficient, but prices do not always reflect underlying business performance. One imperfect but simple way to consider how the market perception of a company has shifted is to compare the change in the earnings per share (EPS) with the share price movement.

Over half a decade, FirstRand managed to grow its earnings per share at 20% a year. The EPS growth is more impressive than the yearly share price gain of 11% over the same period. So it seems the market isn’t so enthusiastic about the stock these days. The reasonably low P/E ratio of 10.72 also suggests market apprehension.

The company’s earnings per share (over time) is depicted in the image below (click to see the exact numbers).

Before buying or selling a stock, we always recommend a close examination of historic growth trends, available here.

It is important to consider the total shareholder return, as well as the share price return, for any given stock. Whereas the share price return only reflects the change in the share price, the TSR includes the value of dividends (assuming they were reinvested) and the benefit of any discounted capital raising or spin-off. So for companies that pay a generous dividend, the TSR is often a lot higher than the share price return. In the case of FirstRand, it has a TSR of 131% for the last 5 years. That exceeds its share price return that we previously mentioned. This is largely a result of its dividend payments!

FirstRand shareholders are up 8.4% for the year (even including dividends). Unfortunately this falls short of the market return. It’s probably a good sign that the company has an even better long term track record, having provided shareholders with an annual TSR of 18% over five years. It’s quite possible the business continues to execute with prowess, even as the share price gains are slowing. It’s always interesting to track share price performance over the longer term. But to understand FirstRand better, we need to consider many other factors. For example, we’ve discovered 1 warning sign for FirstRand that you should be aware of before investing here.