Passive investing in index funds can generate returns that roughly match the overall market. But the truth is, you can make significant gains if you buy good quality businesses at the right price. For example, the Australian Foundation Investment Company Limited (ASX:AFI) share price is 21% higher than it was five years ago, which is more than the market average. In stark contrast, the stock price has actually fallen 1.2% in the last year.

With that in mind, it's worth seeing if the company's underlying fundamentals have been the driver of long term performance, or if there are some discrepancies.

See our latest analysis for Australian Foundation Investment

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, Australian Foundation Investment actually saw its EPS drop 5.9% per year.

The strong decline in earnings per share suggests the market isn't using EPS to judge the company. Given that EPS is down, but the share price is up, it seems clear the market is focussed on other aspects of the business, at the moment.

It is not great to see that revenue has dropped by 0.2% per year over five years. So it seems one might have to take closer look at earnings and revenue trends to see how they might influence the share price.

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

It's good to see that there was some significant insider buying in the last three months. That's a positive. On the other hand, we think the revenue and earnings trends are much more meaningful measures of the business. It might be well worthwhile taking a look at our freereport on Australian Foundation Investment's earnings, revenue and cash flow.

What About Dividends?

When looking at investment returns, it is important to consider the difference between total shareholder return (TSR) and share price return. Whereas the share price return only reflects the change in the share price, the TSR includes the value of dividends (assuming they were reinvested) and the benefit of any discounted capital raising or spin-off. It's fair to say that the TSR gives a more complete picture for stocks that pay a dividend. In the case of Australian Foundation Investment, it has a TSR of 43% for the last 5 years. That exceeds its share price return that we previously mentioned. This is largely a result of its dividend payments!



A Different Perspective

Australian Foundation Investment shareholders gained a total return of 2.3% during the year. Unfortunately this falls short of the market return. On the bright side, the longer term returns (running at about 7% a year, over half a decade) look better. Maybe the share price is just taking a breather while the business executes on its growth strategy. 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. Consider for instance, the ever-present spectre of investment risk.  We've identified 2 warning signs  with Australian Foundation Investment , and understanding them should be part of your investment process.

Australian Foundation Investment is not the only stock insiders are buying. So take a peek at this freelist of growing companies with insider buying.

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