When you buy and hold a stock for the long term, you definitely want it to provide a positive return. But more than that, you probably want to see it rise more than the market average. But Encore Capital Group, Inc. (NASDAQ:ECPG) has fallen short of that second goal, with a share price rise of 76% over five years, which is below the market return. On a brighter note, more newer shareholders are probably rather content with the 46% share price gain over twelve months.
To quote Buffett, 'Ships will sail around the world but the Flat Earth Society will flourish. There will continue to be wide discrepancies between price and value in the marketplace...' 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 five years of share price growth, Encore Capital Group achieved compound earnings per share (EPS) growth of 30% per year. This EPS growth is higher than the 12% average annual increase in the share price. Therefore, it seems the market has become relatively pessimistic about the company. This cautious sentiment is reflected in its (fairly low) P/E ratio of 4.60.
The image below shows how EPS has tracked over time (if you click on the image you can see greater detail).
It is of course excellent to see how Encore Capital Group has grown profits over the years, but the future is more important for shareholders. Take a more thorough look at Encore Capital Group's financial health with this free report on its balance sheet.
A Different Perspective
Encore Capital Group's TSR for the year was broadly in line with the market average, at 46%. 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 12%. 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. 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. Even so, be aware that Encore Capital Group is showing 3 warning signs in our investment analysis , and 2 of those are significant...
But note: Encore Capital Group 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 US exchanges.
This article by Simply Wall St is general in nature. 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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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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