These days it's easy to simply buy an index fund, and your returns should (roughly) match the market.  But in our experience, buying the right stocks can give your wealth a significant boost.  For example, the A. O. Smith Corporation (NYSE:AOS) share price is 85% higher than it was five years ago, which is more than the market average.   It's also good to see a healthy gain of 20% in the last year.      

Since the long term performance has been good but there's been a recent pullback of 3.0%, let's check if the fundamentals match the share price.  

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, A. O. Smith achieved compound earnings per share (EPS) growth of 9.0% per year.   This EPS growth is lower than the 13% average annual increase in the share price.  So it's fair to assume the market has a higher opinion of the business than it did five years ago.  And that's hardly shocking given the track record of growth.  

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

NYSE:AOS Earnings Per Share Growth June 4th 2024

We know that A. O. Smith has improved its bottom line lately, but is it going to grow revenue?  This free report showing analyst revenue forecasts should help you figure out if the EPS growth can be sustained.  

What About Dividends?

As well as measuring the share price return, investors should also consider the total shareholder return (TSR).  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.  As it happens, A. O. Smith's TSR for the last 5 years was 103%, 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

A. O. Smith's TSR for the year was broadly in line with the market average, at 22%.    Most would be happy with a gain, and it helps that the year's return is actually better than the average return over five years, which was 15%.  Even if the share price growth slows down from here, there's a good chance that this is business worth watching in the long term.        Most investors take the time to check the data on insider transactions. You can  click here to see if insiders have been buying or selling.

If you would prefer to check out another company -- one with potentially superior financials -- then do not miss this free list of companies that have proven they can grow earnings.

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.