When you buy and hold a stock for the long term, you definitely want it to provide a positive return. Furthermore, you'd generally like to see the share price rise faster than the market. Unfortunately for shareholders, while the Compass Diversified (NYSE:CODI) share price is up 27% in the last five years, that's less than the market return. Over the last twelve months the stock price has risen a very respectable 7.8%.

Since the stock has added US$64m to its market cap in the past week alone, let's see if underlying performance has been driving long-term returns.

Given that Compass Diversified didn't make a profit in the last twelve months, we'll focus on revenue growth to form a quick view of its business development. When a company doesn't make profits, we'd generally hope to see good revenue growth. That's because fast revenue growth can be easily extrapolated to forecast profits, often of considerable size.

For the last half decade, Compass Diversified can boast revenue growth at a rate of 11% per year. That's a fairly respectable growth rate. While the share price has gained 5% per year for five years, that's hardly amazing considering the market also rose. You could even argue that the share price was over optimistic, previously.

The image below shows how earnings and revenue have tracked over time (if you click on the image you can see greater detail).

It's probably worth noting we've seen significant insider buying in the last quarter, which we consider a positive. That said, we think earnings and revenue growth trends are even more important factors to consider. If you are thinking of buying or selling Compass Diversified stock, you should check out this free report showing analyst profit forecasts.

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. We note that for Compass Diversified the TSR over the last 5 years was 72%, which is better than the share price return mentioned above. This is largely a result of its dividend payments!

A Different Perspective

Compass Diversified shareholders are up 13% for the year (even including dividends). But that was short of the market average. On the bright side, that's still a gain, and it's actually better than the average return of 12% over half a decade It is possible that returns will improve along with the business fundamentals. 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 instance, we've identified 2 warning signs for Compass Diversified (1 is a bit concerning) that you should be aware of.

There are plenty of other companies that have insiders buying up shares. You probably do not want to miss this free list of undervalued small cap 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 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.

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