The most you can lose on any stock (assuming you don't use leverage) is 100% of your money. But when you pick a company that is really flourishing, you can make more than 100%. Long term West African Resources Limited (ASX:WAF) shareholders would be well aware of this, since the stock is up 287% in five years. It's also good to see the share price up 37% over the last quarter.

Since the long term performance has been good but there's been a recent pullback of 7.6%, let's check if the fundamentals match the share price.

Check out our latest analysis for West African Resources

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

During the last half decade, West African Resources became profitable. Sometimes, the start of profitability is a major inflection point that can signal fast earnings growth to come, which in turn justifies very strong share price gains. Given that the company made a profit three years ago, but not five years ago, it is worth looking at the share price returns over the last three years, too. We can see that the West African Resources share price is down 17% in the last three years. Meanwhile, EPS is up 312% per year. So there seems to be a mismatch between the positive EPS growth and the change in the share price, which is down -6% per year.

You can see below how EPS has changed over time (discover the exact values by clicking on the image).

It is of course excellent to see how West African Resources has grown profits over the years, but the future is more important for shareholders. It might be well worthwhile taking a look at our free report on how its financial position has changed over time.

A Different Perspective

West African Resources shareholders are down 24% for the year, but the market itself is up 12%. Even the share prices of good stocks drop sometimes, but we want to see improvements in the fundamental metrics of a business, before getting too interested. Longer term investors wouldn't be so upset, since they would have made 31%, each year, over five years. 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. I find it very interesting to look at share price over the long term as a proxy for business performance. But to truly gain insight, we need to consider other information, too. Consider for instance, the ever-present spectre of investment risk. We've identified 1 warning sign with West African Resources , and understanding them should be part of your investment process.