Unfortunately, investing is risky – companies can and do go bankrupt. But if you pick the right business to buy shares in, you can make more than you can lose. Take, for example Gem Diamonds Limited (LON:GEMD). Its share price is already up an impressive 156% in the last twelve months. It's also up 12% in about a month. Unfortunately the longer term returns are not so good, with the stock falling 40% in the last three years.

Check out our latest analysis for Gem Diamonds

While markets are a powerful pricing mechanism, share prices reflect investor sentiment, not just underlying business performance. 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.

During the last year Gem Diamonds grew its earnings per share (EPS) by 140%. This EPS growth is reasonably close to the 156% increase in the share price. This makes us think the market hasn't really changed its sentiment around the company, in the last year. We don't think its coincidental that the share price is growing at a similar rate to the earnings per share.

The company's earnings per share (over time) is depicted in the image below (click to see the exact numbers).

We know that Gem Diamonds has improved its bottom line over the last three years, but what does the future have in store? If you are thinking of buying or selling Gem Diamonds stock, you should check out this FREE detailed report on its balance sheet.

What About Dividends?

It is important to consider the total shareholder return, as well as the share price return, for any given stock. The TSR is a return calculation that accounts for the value of cash dividends (assuming that any dividend received was reinvested) and the calculated value of any discounted capital raisings and spin-offs. It's fair to say that the TSR gives a more complete picture for stocks that pay a dividend. As it happens, Gem Diamonds' TSR for the last year was 162%, which exceeds the share price return mentioned earlier. This is largely a result of its dividend payments!

A Different Perspective

We're pleased to report that Gem Diamonds shareholders have received a total shareholder return of 162% over one year. And that does include the dividend. Notably the five-year annualised TSR loss of 6% per year compares very unfavourably with the recent share price performance. The long term loss makes us cautious, but the short term TSR gain certainly hints at a brighter future. 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. For example, we've discovered 2 warning signs for Gem Diamonds (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies we expect will grow earnings.

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

This article by Simply Wall St is general in nature. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.