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When you buy a stock there is always a possibility that it could drop 100%. But on a lighter note, a good company can see its share price rise well over 100%. For example, the Berkshire Hathaway Inc. (NYSE:BRK.A) share price has soared 181% in the last half decade. Most would be very happy with that. Also pleasing for shareholders was the 17% gain in the last three months.
Since the stock has added US$82b to its market cap in the past week alone, let's see if underlying performance has been driving long-term returns.
While markets are a powerful pricing mechanism, share prices reflect investor sentiment, not just underlying business performance. 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.
Over half a decade, Berkshire Hathaway managed to grow its earnings per share at 4.4% a year. This EPS growth is lower than the 23% 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 company's earnings per share (over time) is depicted in the image below (click to see the exact numbers).
It's probably worth noting that the CEO is paid less than the median at similar sized companies. It's always worth keeping an eye on CEO pay, but a more important question is whether the company will grow earnings throughout the years. It might be well worthwhile taking a look at our free report on Berkshire Hathaway's earnings, revenue and cash flow.
A Different Perspective
It's nice to see that Berkshire Hathaway shareholders have received a total shareholder return of 31% over the last year. That gain is better than the annual TSR over five years, which is 23%. Therefore it seems like sentiment around the company has been positive lately. In the best case scenario, this may hint at some real business momentum, implying that now could be a great time to delve deeper. 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 1 warning sign for Berkshire Hathaway that you should be aware of.
Of course Berkshire Hathaway may not be the best stock to buy. So you may wish to see this free collection of growth stocks.
