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As an investor, mistakes are inevitable. But you want to avoid the really big losses like the plague. So take a moment to sympathize with the long term shareholders of Frontier Developments plc (LON:FDEV), who have seen the share price tank a massive 85% over a three year period. That would be a disturbing experience. On top of that, the share price is down 9.1% in the last week. However, this move may have been influenced by the broader market, which fell 9.8% in that time. We really feel for shareholders in this scenario. It's a good reminder of the importance of diversification, and it's worth keeping in mind there's more to life than money, anyway.
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.
To paraphrase Benjamin Graham: Over the short term the market is a voting machine, but over the long term it's a weighing machine. One way to examine how market sentiment has changed over time is to look at the interaction between a company's share price and its earnings per share (EPS).
Frontier Developments became profitable within the last five years. That would generally be considered a positive, so we are surprised to see the share price is down. So given the share price is down it's worth checking some other metrics too.
Arguably the revenue decline of 9.1% per year has people thinking Frontier Developments is shrinking. After all, if revenue keeps shrinking, it may be difficult to find earnings growth in the future.
The image below shows how earnings and revenue have tracked over time (if you click on the image you can see greater detail).
We know that Frontier Developments has improved its bottom line lately, but what does the future have in store? So we recommend checking out this free report showing consensus forecasts
A Different Perspective
While the broader market lost about 1.5% in the twelve months, Frontier Developments shareholders did even worse, losing 4.3%. Having said that, it's inevitable that some stocks will be oversold in a falling market. The key is to keep your eyes on the fundamental developments. However, the loss over the last year isn't as bad as the 13% per annum loss investors have suffered over the last half decade. We'd need to see some sustained improvements in the key metrics before we could muster much enthusiasm. 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. Case in point: We've spotted 3 warning signs for Frontier Developments you should be aware of, and 1 of them is concerning.