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McGrath Limited (ASX:MEA) shareholders should be happy to see the share price up 24% in the last month. But that doesn't change the fact that the returns over the last three years have been stomach churning. To wit, the share price sky-dived 73% in that time. Arguably, the recent bounce is to be expected after such a bad drop. Of course the real question is whether the business can sustain a turnaround.

View our latest analysis for McGrath

McGrath isn't a profitable company, so it is unlikely we'll see a strong correlation between its share price and its earnings per share (EPS). Arguably revenue is our next best option. When a company doesn't make profits, we'd generally expect to see good revenue growth. That's because it's hard to be confident a company will be sustainable if revenue growth is negligible, and it never makes a profit.

In the last three years McGrath saw its revenue shrink by 6.4% per year. That's not what investors generally want to see. Having said that the 35% annualized share price decline highlights the risk of investing in unprofitable companies. This business clearly needs to grow revenues if it is to perform as investors hope. There's no more than a snowball's chance in hell that share price will head back to its old highs, in the short term.

You can see how revenue and earnings have changed over time in the image below, (click on the chart to see cashflow).

It's probably worth noting that the CEO is paid less than the median at similar sized companies. It's always worth keeping an eye on CEO pay, but a more important question is whether the company will grow earnings throughout the years. Dive deeper into the earnings by checking this interactive graph of McGrath's earnings, revenue and cash flow.

A Different Perspective

Over the last year, McGrath shareholders took a loss of 21%. In contrast the market gained about 10%. Of course the long term matters more than the short term, and even great stocks will sometimes have a poor year. However, the loss over the last year isn't as bad as the 34% per annum loss investors have suffered over the last three years. We'd need clear signs of growth in the underlying business before we could muster much enthusiasm for this one. Before spending more time on McGrath it might be wise to click here to see if insiders have been buying or selling shares.

But note: McGrath may not be the best stock to buy. So take a peek at this free list of interesting companies with past earnings growth (and further growth forecast).

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

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.