Generally speaking the aim of active stock picking is to find companies that provide returns that are superior to the market average. Buying under-rated businesses is one path to excess returns. For example, long term Luceco plc (LON:LUCE) shareholders have enjoyed a 38% share price rise over the last half decade, well in excess of the market return of around 27% (not including dividends). On the other hand, the more recent gains haven't been so impressive, with shareholders gaining just 9.4%, including dividends.

Now it's worth having a look at the company's fundamentals too, because that will help us determine if the long term shareholder return has matched the performance of the underlying business.

View our latest analysis for Luceco

In his essay The Superinvestors of Graham-and-Doddsville Warren Buffett described how share prices do not always rationally reflect the value of a business. 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.

Over half a decade, Luceco managed to grow its earnings per share at 14% a year. This EPS growth is higher than the 7% average annual increase in the share price. Therefore, it seems the market has become relatively pessimistic about the company.

The graphic below depicts how EPS has changed over time (unveil the exact values by clicking on the image).

We consider it positive that insiders have made significant purchases in the last year. Even so, future earnings will be far more important to whether current shareholders make money. Before buying or selling a stock, we always recommend a close examination of historic growth trends, available here..

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, Luceco's TSR for the last 5 years was 61%, which exceeds the share price return mentioned earlier. This is largely a result of its dividend payments!

A Different Perspective

Luceco shareholders gained a total return of 9.4% during the year. Unfortunately this falls short of the market return. If we look back over five years, the returns are even better, coming in at 10% per year for five years. Maybe the share price is just taking a breather while the business executes on its growth strategy. It's always interesting to track share price performance over the longer term. But to understand Luceco better, we need to consider many other factors. Case in point: We've spotted 2 warning signs for Luceco you should be aware of.