Investors can approximate the average market return by buying an index fund. While individual stocks can be big winners, plenty more fail to generate satisfactory returns. That downside risk was realized by Truworths International Limited (JSE:TRU) shareholders over the last year, as the share price declined 48%. That contrasts poorly with the market return of 28%. However, the longer term returns haven’t been so bad, with the stock down 5.3% in the last three years. Furthermore, it’s down 22% in about a quarter. That’s not much fun for holders.

So let’s have a look 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 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.

Unhappily, Truworths International had to report a 29% decline in EPS over the last year. The share price decline of 48% is actually more than the EPS drop. This suggests the EPS fall has made some shareholders more nervous about the business. The P/E ratio of 7.22 also points to the negative market sentiment.

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

Dive deeper into Truworths International’s key metrics by checking this interactive graph of Truworths International’s earnings, revenue and cash flow.

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. So for companies that pay a generous dividend, the TSR is often a lot higher than the share price return. We note that for Truworths International the TSR over the last 1 year was -45%, which is better than the share price return mentioned above. This is largely a result of its dividend payments!

Truworths International shareholders are down 45% for the year (even including dividends), but the market itself is up 28%. Even the share prices of good stocks drop sometimes, but we want to see improvements in the fundamental metrics of a business, before getting too interested. Longer term investors wouldn’t be so upset, since they would have made 15%, 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. 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. To that end, you should learn about the 4 warning signs we’ve spotted with Truworths International (including 1 which is a bit concerning) .