Why Have Dairy Farm International Holdings Ltd’s Shares Lost 15% In Value In 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 Dairy Farm International Holdings Ltd (SGX: D01) over its last five completed fiscal years and track its total returns (total returns would factor in the gains from reinvested dividends along with the stock’s price changes).

The following table shows Dairy Farm’s business results:

Dairy Farm business results table
Source: S&P Global Market Intelligence

From the table above, we can see that Dairy Farm’s revenue has been growing in each year since 2011. But, the top-line growth did not get translated into commensurate increases in operating income given the contraction in the operating margin from 5.9% to 3.9%.

While Dairy Farm’s 2015 ROE of 28% is still a higher than the market average, it still represents a big decline from the 58% seen in 2011. It’s worth pointing too that Dairy Farm’s balance sheet had weakened over the past five years given the higher gearing.

On the whole, the business performance of Dairy Farm has not been good in recent years.

In the five years ended 13 June 2016, Dairy Farm’s shares have fallen by 24% in price alone, sliding from US$8.66 to US$6.54. If gains from reinvested dividends are factored in, Dairy Farm had generated total returns of a negative 15%.

So as you can see, there has been some correlation between Dairy Farm’s business and its stock for the timeframes under study.

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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.