While Waterco Limited (ASX:WAT) shareholders are probably generally happy, the stock hasn’t had particularly good run recently, with the share price falling 23% in the last quarter. But in stark contrast, the returns over the last half decade have impressed. We think most investors would be happy with the 210% return, over that period. We think it’s more important to dwell on the long term returns than the short term returns. Of course, that doesn’t necessarily mean it’s cheap now.

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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There is no denying that markets are sometimes efficient, but prices do not always reflect underlying business performance. By comparing earnings per share (EPS) and share price changes over time, we can get a feel for how investor attitudes to a company have morphed over time.

During five years of share price growth, Waterco achieved compound earnings per share (EPS) growth of 27% per year. This EPS growth is reasonably close to the 25% average annual increase in the share price. This indicates that investor sentiment towards the company has not changed a great deal. Rather, the share price has approximately tracked EPS growth.

The image below shows how EPS has tracked over time (if you click on the image you can see greater detail).

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. 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 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. We note that for Waterco the TSR over the last 5 years was 248%, which is better than the share price return mentioned above. This is largely a result of its dividend payments!

We’re pleased to report that Waterco shareholders have received a total shareholder return of 21% over one year. And that does include the dividend. Having said that, the five-year TSR of 28% a year, is even better. 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 example, we’ve discovered 2 warning signs for Waterco (1 is a bit concerning!) that you should be aware of before investing here.