a2 Milk (NZSE:ATM) shareholders have earned a 75% return over the last year

If you want to compound wealth in the stock market, you can do so by buying an index fund. But you can significantly boost your returns by picking above-average stocks. To wit, the The a2 Milk Company Limited (NZSE:ATM) share price is 71% higher than it was a year ago, much better than the market return of around 2.3% (not including dividends) in the same period. So that should have shareholders smiling. It is also impressive that the stock is up 42% over three years, adding to the sense that it is a real winner.

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.

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While the efficient markets hypothesis continues to be taught by some, it has been proven that markets are over-reactive dynamic systems, and investors are not always rational. 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).

a2 Milk was able to grow EPS by 21% in the last twelve months. This EPS growth is significantly lower than the 71% increase in the share price. This indicates that the market is now more optimistic about the stock.

The image below shows how EPS has tracked over time (if you click on the image you can see greater detail).

We like that insiders have been buying shares in the last twelve months. Even so, future earnings will be far more important to whether current shareholders make money. This free interactive report on a2 Milk's earnings, revenue and cash flow is a great place to start, if you want to investigate the stock further.

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. So for companies that pay a generous dividend, the TSR is often a lot higher than the share price return. In the case of a2 Milk, it has a TSR of 75% for the last 1 year. That exceeds its share price return that we previously mentioned. And there's no prize for guessing that the dividend payments largely explain the divergence!

A Different Perspective

It's good to see that a2 Milk has rewarded shareholders with a total shareholder return of 75% in the last twelve months. That's including the dividend. There's no doubt those recent returns are much better than the TSR loss of 1.1% per year over five years. This makes us a little wary, but the business might have turned around its fortunes. While it is well worth considering the different impacts that market conditions can have on the share price, there are other factors that are even more important. Take risks, for example - a2 Milk has 1 warning sign we think you should be aware of.

a2 Milk is not the only stock insiders are buying. So take a peek at this free list of small cap companies at attractive valuations which insiders have been buying.

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