Long term investing can be life changing when you buy and hold the truly great businesses. And highest quality companies can see their share prices grow by huge amounts. To wit, the Cipher Pharmaceuticals Inc. (TSE:CPH) share price has soared 883% over five years. This just goes to show the value creation that some businesses can achieve. Meanwhile the share price is 2.6% higher than it was a week ago. Anyone who held for that rewarding ride would probably be keen to talk about it.

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

View our latest analysis for Cipher Pharmaceuticals

In his essay The Superinvestors of Graham-and-Doddsville Warren Buffett described how share prices do not always rationally reflect the value of a business. One flawed but reasonable way to assess how sentiment around a company has changed is to compare the earnings per share (EPS) with the share price.

During the last half decade, Cipher Pharmaceuticals became profitable. That kind of transition can be an inflection point that justifies a strong share price gain, just as we have seen here. Given that the company made a profit three years ago, but not five years ago, it is worth looking at the share price returns over the last three years, too. We can see that the Cipher Pharmaceuticals share price is up 664% in the last three years. During the same period, EPS grew by 51% each year. Notably, the EPS growth has been slower than the annualised share price gain of 97% over three years. So one can reasonably conclude the market is more enthusiastic about the stock than it was three years ago.

You can see below how EPS has changed over time (discover the exact values by clicking on the image).

It is of course excellent to see how Cipher Pharmaceuticals has grown profits over the years, but the future is more important for shareholders. You can see how its balance sheet has strengthened (or weakened) over time in this free interactive graphic.

It’s nice to see that Cipher Pharmaceuticals shareholders have received a total shareholder return of 161% over the last year. That gain is better than the annual TSR over five years, which is 58%. Therefore it seems like sentiment around the company has been positive lately. Given the share price momentum remains strong, it might be worth taking a closer look at the stock, lest you miss an opportunity. 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 example, we’ve discovered 3 warning signs for Cipher Pharmaceuticals (1 makes us a bit uncomfortable!) that you should be aware of before investing here.