Why Have First Resources Ltd’s Shares Increased In Value By 26% Over The Last 5 Years?

A veteran investor once told me: “Investing is about giving up your purchasing power today in the hopes of getting higher purchasing power in the future.”

In stock market investing, the above quote translates into buying stocks that will increase in value in the future, both through an appreciation in a stock’s price and the dividends the stock distributes.

Both factors – price appreciation and dividends – are generally derived from the same source, a company’s profit.

This profit is, in turn, driven by a company’s business performance. In general, companies with strong businesses exhibit sustainable growth, high margins, high returns on equity, and low gearing (gearing is a gauge of how much debt a company’s employing)..

In here, I want to look at the business performance of palm oil producer First Resources Ltd (SGX: EB5) over its last five completed fiscal years and track its total returns in that period (total returns would include gains from reinvested dividends along with the stock’s price changes).

Here’s a table of First Resources’ business performance:

First Resources business performance table
Source: S&P Global Market Intelligence

As you can see, First Resources had managed to grow its revenue, operating income, and earnings per share from 2011 to 2013 before the numbers started to trend downward. The declines have been big, as the company ended 2015 with lower revenue, operating income, and earnings per share when compared to 2011.

The return on equity, a measure of the return that First Resources generates on its shareholders’ capital, had been strong between 2011 and 2013 (above 20%). But, the figure had also started sliding in 2014 and 2015, coming in at just 10.4%  in the latter year.

As a whole, the financials of First Resources seemed to have performed well before 2014. From that year on, the firm started facing headwinds partly due to a decline in crude palm oil prices.

Over the past five years since 31 May 2011, First Resources’ shares have actually climbed by 14% in price alone, despite the lower earnings per share. This could be a result of First Resources’ shares carrying a really low valuation back then. When gains from reinvested dividends are brought into the picture, First Resources’ total returns over the same period become 26%.

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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 Lawrence Nga doesn’t own shares in any companies mentioned.