Investors can approximate the average market return by buying an index fund. Active investors aim to buy stocks that vastly outperform the market - but in the process, they risk under-performance. For example, the Arcos Dorados Holdings Inc. (NYSE:ARCO) share price is down 40% in the last year. That's disappointing when you consider the market returned 26%. On the other hand, the stock is actually up 39% over three years. Even worse, it's down 17% in about a month, which isn't fun at all.

With the stock having lost 11% in the past week, it's worth taking a look at business performance and seeing if there's any red flags.

While markets are a powerful pricing mechanism, share prices reflect investor sentiment, not just underlying business performance. 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.

Unfortunately Arcos Dorados Holdings reported an EPS drop of 19% for the last year. The share price decline of 40% is actually more than the EPS drop. Unsurprisingly, given the lack of EPS growth, the market seems to be more cautious about the stock. The less favorable sentiment is reflected in its current P/E ratio of 10.42.

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

We know that Arcos Dorados Holdings has improved its bottom line over the last three years, but what does the future have in store? If you are thinking of buying or selling Arcos Dorados Holdings stock, you should check out this FREE detailed report on its balance sheet.

A Different Perspective

Arcos Dorados Holdings shareholders are down 39% for the year (even including dividends), but the market itself is up 26%. However, keep in mind that even the best stocks will sometimes underperform the market over a twelve month period. Regrettably, last year's performance caps off a bad run, with the shareholders facing a total loss of 0.2% per year over five years. Generally speaking long term share price weakness can be a bad sign, though contrarian investors might want to research the stock in hope of a turnaround. 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. Take risks, for example - Arcos Dorados Holdings has 3 warning signs (and 1 which is concerning) we think you should know about.

But note: Arcos Dorados Holdings may not be the best stock to buy. So take a peek at this free list of interesting companies with past earnings growth (and further growth forecast).

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

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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.