Despite the downward trend in earnings at Shemaroo Entertainment, stock surges 13%

It might seem bad, but the worst that can happen when you buy a stock (without leverage) is that its share price goes to zero. But when you pick a company that is really flourishing, you can make more than 100%. To wit, the Shemaroo Entertainment Limited (NSE:SHEMAROO) share price has flown 130% in the last three years. That sort of return is as solid as granite. It’s also good to see the share price up 28% over the last quarter.

Since the stock has added ₹496m to its market cap in the past week alone, let’s see if underlying performance has been driving long-term returns.

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 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.

Over the last three years, Shemaroo Entertainment failed to grow earnings per share, which fell 32% (annualized).

This means it’s unlikely the market is judging the company based on earnings growth. Given this situation, it makes sense to look at other metrics too.

It may well be that Shemaroo Entertainment revenue growth rate of 5.3% over three years has convinced shareholders to believe in a brighter future. If the company is being managed for the long term good, today’s shareholders might be right to hold on. Simply Wall St