iFAST Corporation Ltd’s Shares Have Ballooned By 37% Since The End of Last Year: What’s Next?

iFAST Corporation Ltd (SGX: AIY), which owns platforms for the distribution of investment products, has seen its shares jump by 37% since the end of 2014. What’s going on with the company? Let’s find out here.

A simple framework

There can be good reasons as well as poor reasons for why a stock’s price moves.

For the Foolish investor, understanding the right reason is important. If we can determine the reason, we may get an inkling on whether the movement in the stock price is deserved or undeserved and thus act accordingly.

To help with this, I would like to defer to a couple of paragraphs from The Little Book that Builds Wealth by author and fund manager Pat Dorsey:

“Over loinng stretches of time, there are just two things that push a stock up or down: The investment return, driven by earnings growth and dividends, and the speculative return, driven by changes the price-earnings (P/E) ratio.

Think of the investment return as reflecting a company’s financial performance, and the speculative return as reflecting the exuberance or pessimism of other investors.”

Under Dorsey’s framework, stock price returns can be from the deserved-end of the spectrum (investment return), the undeserved-end of the spectrum (speculative return), or anywhere in between.

Deciphering the gain

We can track the reasons for iFAST’s stock price movement by noting down simple but important financial metrics like the firm’s earnings per share (EPS) and price to earnings (PE ratio); these numbers could also be a simple way for you to track the progress of a company over time and can form part of your investment journal entries.

You can see below how iFAST’s EPS, PE ratio, and stock price have changed compared to end-2014:

iFast EPS, PE, stock price detail

Source: Google Finance; earnings report

I trust it’s easy to observe how the gains in iFAST’s stock price can be attributed mainly to a higher PE ratio.

In the second-quarter of 2015, iFAST recorded strong growth in both ends of its income statement. Revenue went up close to 22% year-on-year while net profit was not far behind with a 24.6% rise.

And there may be more growth to come. iFAST’s Singapore operations had recently received regulatory approval to distribute bonds and exchange traded funds. Beyond that, the company also entered into an agreement to acquire a stockbroking firm, Winfield Securities Limited, in Hong Kong.

The optimism may be reflected in the higher PE ratio that the company is sporting right now. For context, the PE ratio for the SPDR STI ETF (SGX: ES3) – an exchange-traded fund which mimics the market barometer, the Straits Times Index (SGX: ^STI) – is around 12 at the moment.

Foolish takeaway

If a stock price rises (or falls), we should try to understand if it is backed by a company’s fundamental growth (decline), or whether it is simply a result of investor exuberance (pessimism).

When we understand the difference, we may become a better judge on whether a stock’s price gains (losses) are justified – with commensurate growth (decline) in earnings – or had happened because of the market’s irrationality. Such knowledge can then aid us in our decision making.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.