In order to justify the effort of selecting individual stocks, it’s worth striving to beat the returns from a market index fund. But its virtually certain that sometimes you will buy stocks that fall short of the market average returns. Unfortunately, that’s been the case for longer term Ellington Financial Inc. (NYSE:EFC) shareholders, since the share price is down 29% in the last three years, falling well short of the market return of around 21%. More recently, the share price has dropped a further 11% in a month. But this could be related to poor market conditions — stocks are down 7.6% in the same time.

It’s worthwhile assessing if the company’s economics have been moving in lockstep with these underwhelming shareholder returns, or if there is some disparity between the two. So let’s do just that.

Our free stock report includes 3 warning signs investors should be aware of before investing in Ellington Financial. Read for free now.

There is no denying that markets are sometimes efficient, but prices do not always reflect 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).

Ellington Financial saw its EPS decline at a compound rate of 20% per year, over the last three years. In comparison the 11% compound annual share price decline isn’t as bad as the EPS drop-off. This suggests that the market retains some optimism around long term earnings stability, despite past EPS declines.

You can see how EPS has changed over time in the image below (click on the chart to see the exact values).

We know that Ellington Financial has improved its bottom line lately, but is it going to grow revenue? Check if analysts think Ellington Financial will grow revenue in the future.

As well as measuring the share price return, investors should also consider the total shareholder return (TSR). 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 Ellington Financial, it has a TSR of 5.8% for the last 3 years. That exceeds its share price return that we previously mentioned. The dividends paid by the company have thusly boosted the total shareholder return.

We’re pleased to report that Ellington Financial shareholders have received a total shareholder return of 22% over one year. Of course, that includes the dividend. That gain is better than the annual TSR over five years, which is 17%. Therefore it seems like sentiment around the company has been positive lately. Someone with an optimistic perspective could view the recent improvement in TSR as indicating that the business itself is getting better with time. It’s always interesting to track share price performance over the longer term. But to understand Ellington Financial 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 Ellington Financial (at least 2 which are significant) , and understanding them should be part of your investment process.