Rakon Limited (NZSE:RAK) shareholders might be concerned after seeing the share price drop 20% in the last month. But that doesn't displace its brilliant performance over three years. Over that time, we've been excited to watch the share price climb an impressive 347%. As long term investors the recent fall doesn't detract all that much from the longer term story. The only way to form a view of whether the current price is justified is to consider the merits of the business itself.
Let's take a look at the underlying fundamentals over the longer term, and see if they've been consistent with shareholders returns.
View our latest analysis for Rakon
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. 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.
Rakon was able to grow its EPS at 124% per year over three years, sending the share price higher. This EPS growth is higher than the 65% average annual increase in the share price. So one could reasonably conclude that the market has cooled on the stock. We'd venture the lowish P/E ratio of 6.39 also reflects the negative sentiment around the stock.
You can see how EPS has changed over time in the image below (click on the chart to see the exact values).
It is of course excellent to see how Rakon has grown profits over the years, but the future is more important for shareholders. Take a more thorough look at Rakon's financial health with this free report on its balance sheet.
A Different Perspective
We regret to report that Rakon shareholders are down 49% for the year. Unfortunately, that's worse than the broader market decline of 2.2%. 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. On the bright side, long term shareholders have made money, with a gain of 34% per year over half a decade. It could be that the recent sell-off is an opportunity, so it may be worth checking the fundamental data for signs of a long term growth trend. It's always interesting to track share price performance over the longer term. But to understand Rakon better, we need to consider many other factors. Take risks, for example - Rakon has 1 warning sign we think you should be aware of.
If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).