Why Have Riverstone Holdings Limited’s Shares Soared By 408% In Value Over The Last 5 Years?

A veteran investor once told me that “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 taking on).

In here, I want to look at the business performance of Riverstone Holdings Limited (SGX: BN4) over its last five completed fiscal years and track its total returns in that period (total returns would factor in the gains from reinvested dividends along with the stock’s price changes).

You can see Riverstone’s business results in the following table:

Riverstone business performance table
Source: S&P Global Market Intelligence

What’s striking here about Riverstone is its strong growth in both revenue and profit from 2011 to 2015. The former has climbed at an annual rate of 19.7% in that period while the latter has soared by 29%%.

The company’s returns on equity, a measure of the return that Riverstone can generate with its shareholders’ capital, have also come in at a healthy rate of 16.6% or more in the past five years. What’s even more commendable is that the company had achieved those returns on equity while having a debt-free balance sheet.

The only ding is that Riverstone’s operating margin has shown some wild fluctuations.

In the five years ended 5 June 2016, Riverstone’s shares have climbed by 319% in price alone. In terms of total returns, that figure would be an even more impressive 408%. As you can see, there is some strong correlation between the performance of Riverstone’s business and its stock over a multi-year period.

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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.