The worst outcome, after buying shares in a company (without leverage), would be to lose all the money you invested. But on the bright side, you can earn well over 100% on a really good stock. For example, the price of GK SE software (ETR: GKS) has grown 203% over the past five years. On top of that, the stock price rose 21% in about a quarter. But that could be related to the strength of the market, which has risen 9.1% in the past three months.

Check out our latest review for GK Software

In his essay Graham-et-Doddsville superinvestors Warren Buffett described how stock prices don’t always rationally reflect a company’s value. An imperfect but straightforward way to consider how a company’s market perception has changed is to compare the change in earnings per share (EPS) with the movement in the share price.

Over the five years of share price growth, GK Software has gone from loss to profitability. Sometimes the onset of profitability is a major inflection point that can signal rapid growth in future earnings, which in turn justifies very large increases in stock prices. Considering the business was unprofitable five years ago, but not three years ago, it’s worth taking a look at the returns of the past three years as well. Indeed, the GK Software share price has gained 25% in three years. Meanwhile, EPS is up 14% per year. This EPS growth is greater than the 8% average annual increase in the share price over the same three years. As a result, it appears that the market has moderated its growth expectations somewhat.

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

We know that GK Software has improved its results lately, but will it increase its revenue? Check if analysts believe GK Software will increase revenue in the future.

A different perspective

We are pleased to report that GK Software shareholders have achieved a total shareholder return of 122% over one year. This gain is better than the annual TSR over five years, which is 25%. Therefore, it seems that sentiment around the company has been positive lately. Since the stock price momentum remains strong, it might be worth taking a closer look at the stock for fear of missing out on an opportunity. I find it very interesting to look at the stock price over the long term as an indicator of the performance of the company. But to really understand better, we have to take other information into account as well. Take, for example, the ubiquitous spectrum of investment risk. We have identified 2 warning signs with GK Software, and understanding them should be part of your investment process.

Of course GK Software may not be the best stock to buy. Then you might want to see this free collection of growth stocks.

Please note that the market returns quoted in this article reflect the market-weighted average returns of stocks that currently trade on the DE stock exchanges.

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This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take into account your goals or your financial situation. We aim to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative information. Simply Wall St has no position in any of the stocks mentioned.
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