Why Have SATS Ltd’s Shares Gained 186% In Value In 5 Years?

Source: SATS

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 study the historical business performance of SATS Ltd (SGX: S58) over its last five fiscal 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).

Here’s a table showing some of SATS’s important business numbers:

SATS's business performance table
Source: S&P Global Market Intelligence

One striking thing here is that SATS’s revenue has barely grown from FY2012 to FY2016. But, it has managed to increase its earnings per share by 29% and at the same time, improve its return on equity from 11.4% to 14.2%.

The return on equity measures a company’s ability to generate a profit with the shareholder’s capital it has. In general, a high quality business will have a high return on equity (assuming that only low levels of debt are used).

This brings me to SATS’s gearing. As you can see from the table, the company’s gearing has been kept low at less than 10% for the period under study.

Over the five years ended 18 August 2016, SATS has seen its stock price climb by 119%. When gains from reinvested dividends enter the picture, the total return increases to 186%.

Some of you may have noticed that SATS’s stock appears to have moved ahead of its business results. But, there’s still some correlation between the long-term performance of SATS’s business and the returns of its stock. This helps drive home the important message that a stock’s long-term price changes are often driven by how well 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.