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…
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 land transport services provider ComfortDelgro Corporation Ltd (SGX: C52) 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).
Here’s how Comfortdelgro’s business has done over the last five years:
Source: S&P Global Market Intelligence
With reference to the table above, Comfortdelgro’s revenue and earnings per share have both increased by over 20% from 2015 to 2011.
Meanwhile, Comfortdelgro’s return on equity (ROE) has managed to remain stable between 12.1% and 12.4%. The ROE is a measure of a company’s ability to generate a profit using the shareholder dollars that it has; in general a higher ROE will correspond to a higher-quality business if undue leverage isn’t used by the company.
This brings me to Comfortdelgro’s gearing, which as you can see in the table, has declined over the years. This makes the land transport company’s stable ROE more impressive – the use of debt can help juice up the ROE of a company but Comfortdelgro has instead been paring down its debt.
As a whole, Comfortdelgro’s business seems to be growing at a steady, albeit unspectacular, pace.
In the five years ended 21 June 2016, Comfortdelgro’s shares have nearly doubled in price from S$1.38 to S$2.74. If gains from reinvested dividends are thrown into the broth, the land transport company’s total returns would be 136%.
Comfortdelgro’s strong returns in the last five years have come from both capital appreciation and dividends. From 2011 to 2015, the firm’s earnings per share have gone up by ‘just’ 25% in total. From this, it appears that the company’s stock price is running ahead of its business performance.
But in sum, we can see that there has been some correlation between the performance of Comfortdelgro’s business and its stock over the long-term. This is important to note as it helps drive home the idea that a stock’s long-term price changes are governed by how well or poorly its business does.
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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.