Medica Group's (LON:MGP) investors will be pleased with their decent 34% return over the last three years

By buying an index fund, you can roughly match the market return with ease. But many of us dare to dream of bigger returns, and build a portfolio ourselves. Just take a look at Medica Group Plc (LON:MGP), which is up 28%, over three years, soundly beating the market decline of 1.3% (not including dividends).

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

See our latest analysis for Medica Group

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 three years of share price growth, Medica Group actually saw its earnings per share (EPS) drop 12% per year.

So we doubt that the market is looking to EPS for its main judge of the company's value. Given this situation, it makes sense to look at other metrics too.

Languishing at just 1.7%, we doubt the dividend is doing much to prop up the share price. It could be that the revenue growth of 9.3% per year is viewed as evidence that Medica Group is growing. If the company is being managed for the long term good, today's shareholders might be right to hold on.

You can see below how earnings and revenue have changed over time (discover the exact values by clicking on the image).

earnings-and-revenue-growth

We know that Medica Group has improved its bottom line lately, but what does the future have in store? You can see what analysts are predicting for Medica Group in this interactive graph of future profit estimates.

What About Dividends?

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. Arguably, the TSR gives a more comprehensive picture of the return generated by a stock. As it happens, Medica Group's TSR for the last 3 years was 34%, which exceeds the share price return mentioned earlier. And there's no prize for guessing that the dividend payments largely explain the divergence!

A Different Perspective

We regret to report that Medica Group shareholders are down 6.0% for the year (even including dividends). Unfortunately, that's worse than the broader market decline of 4.5%. Having said that, it's inevitable that some stocks will be oversold in a falling market. The key is to keep your eyes on the fundamental developments. Unfortunately, last year's performance may indicate unresolved challenges, given that it was worse than the annualised loss of 4% over the last half decade. We realise that Baron Rothschild has said investors should "buy when there is blood on the streets", but we caution that investors should first be sure they are buying a high quality business. Is Medica Group cheap compared to other companies? These 3 valuation measures might help you decide.

If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.

Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on GB exchanges.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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