Why Have ARA Asset Management Limited’s Shares Gained 32% In Value Over 5 Years?

I think it is fair to say that most investors want to find stocks that can increase in value in the future, either from an appreciation in the share price or through the distribution of dividends.

So, it’s worth keeping in mind the idea that 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 leverage (leverage is a gauge of how much debt a company’s taking on).

In here, I want to observe the historical business performance of ARA Asset Management Limited  (SGX: D1R) over the past five years and track the total return of its stock (the total return would factor in gains from reinvested dividends along with the stock’s price changes).

The following is a table showing how ARA Asset Management’s business has evolved:

ARA business table for 5 years (2)
Source: S&P Global Market Intelligence

From 2011 to 2015, the company’s revenue has managed to grow by 27%. But, its earnings per share was relatively flat, increasing by just 11%.

We can also see that ARA Asset Management’s return on equity has fallen drastically over the years. The return on equity measures a company’s ability to generate a profit with the shareholder’s capital it has. Genereally speaking, a high quality business will have a high return on equity (assuming that high levels of debt aren’t used).

A positive takeaway here is that ARA Asset Management’s gearing has remained low at less than 15% throughout the timeframe under study.

Given the company’s flat earnings, it’s perhaps no surprise to learn that ARA Asset Management’s share price has not changed much in the five years ended 16 August 2016, moving up by just 6.5% from S$1.29 to S$1.375. But, when dividends are factored in, the company’s total returns become stronger at 32%.

What we’ve seen here showcase two important ideas in investing: (1) A stock’s price is often determined by the performance of its business over the long-term; and (2) dividends can be a crucial component of an investor’s long-term returns.

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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.