Why Have Raffles Medical Group Ltd’s Shares Gained 117% 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. That value can come from an appreciation in a stock’s price as well as 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 healthcare services provider Raffles Medical Group Ltd (SGX: BSL) 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 illustrates Raffles Medical Group’s business performance:

Raffles Medical business performance
Source: S&P Global Market Intelligence

We can see that Raffles Medical has seen its revenue and earnings per share grow by 50% and 28%, respectively, from 2011 to 2015. It’s worth noting the company’s consistent revenue growth too.

Meanwhile, Raffles Medical’s return on equity (ROE) has declined from 16.3% in 2011 to ‘just’ 11.9% in 2015. The ROE measures a company’s ability to generate a profit using the shareholder dollars that it has. Generally speaking, a high ROE is linked to a high-quality business if debt is used sparingly by the company.

This segues nicely into Raffles Medical’s gearing. As the table shows, the company’s gearing has been really low for the timeframe under study, peaking at just 6.4%. So, it’s apparent that the healthcare provider’s decent ROE of the low- to mid-teens did not get much help from the use of high leverage.

In the five years ended 27 June 2016, Raffles Medical’s shares have climbed by 103% in price alone. If reinvested dividends were factored in, the company’s total returns would increase slightly to 117%. As mentioned, Raffles Medical’s earnings per share had grown by ‘just’ 28% from 2011 to 2015. When this is compared with the 103% rise in the share price, it’d appear that the healthcare provider’s stock has moved ahead of its business performance.

But that said, it’s still clear that there’s some correlation between the long-term performance of Raffles Medical’s business and its stock. This drives home the important message for investors that a stock’s price is driven by its business over the long run.

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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.