When we invest, we’re generally looking for stocks that outperform the market average. And the truth is, you can make significant gains if you buy good quality businesses at the right price. For example, the Batu Kawan Berhad (KLSE:BKAWAN) share price is up 26% in the last 5 years, clearly besting the market return of around 13% (ignoring dividends).

So let’s investigate and see if the longer term performance of the company has been in line with the underlying business’ progress.

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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).

Batu Kawan Berhad’s earnings per share are down 2.6% per year, despite strong share price performance over five years.

Since EPS is down a bit, and the share price is up, it’s probably that the market previously had some concerns about the company, but the reality has been better than feared. In the long term, though, it will be hard for the share price rises to continue without improving EPS.

The graphic below depicts how EPS has changed over time (unveil the exact values by clicking on the image).

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. 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. It’s fair to say that the TSR gives a more complete picture for stocks that pay a dividend. We note that for Batu Kawan Berhad the TSR over the last 5 years was 52%, which is better than the share price return mentioned above. The dividends paid by the company have thusly boosted the total shareholder return.

Batu Kawan Berhad shareholders are down 1.3% for the year (even including dividends), but the market itself is up 3.4%. However, keep in mind that even the best stocks will sometimes underperform the market over a twelve month period. Longer term investors wouldn’t be so upset, since they would have made 9%, each year, over five years. 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. It’s always interesting to track share price performance over the longer term. But to understand Batu Kawan Berhad better, we need to consider many other factors. Consider for instance, the ever-present spectre of investment risk. We’ve identified 3 warning signs with Batu Kawan Berhad (at least 2 which make us uncomfortable) , and understanding them should be part of your investment process.