Why Have Jardine Strategic Holdings Limited’s Shares Gained Only 6.5% In Value In 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 Jardine Strategic Holdings Limited (SGX: J37) and track the total return of its stock (the total return includes gains from reinvested dividends).

Here’s a table showing some of Jardine Strategic’s important business numbers from 2011 to 2015:

Jardine Strategic's business performance table - Lawrence
Source: S&P Global Market Intelligence

So, what we can see is that Jardine Strategic’s revenue has declined only slightly, but its earnings have dropped significantly.

Given the decline in earnings, it’s perhaps no surprise to see that the firm’s returns on equity have also suffered (the return on equity is calculated by dividing earnings with equity). The return on equity measures a company’s ability to generate a profit with the shareholders’ capital it has. It can also be juiced up through higher leverage (higher leverage will show up through higher gearing).

In the case of Jardine Strategic, its gearing ratio has been maintained in the mid-20s range over the years.

When looking at Jardine Strategic’s earnings per share, it is important to note that the financial number can be affected significantly by property revaluations. Property revaluations in turn, may not signify much about the company’s underlying business conditions.

Over the five years ended 31 August 2016, Jardine Strategic’s share price has gained just 2%. Even when gains from reinvested dividends are factored in, the total return comes in at just 6.5%. The company’s shares have probably been weighed down by its shrinking earnings and returns on equity.

This drives home the important point that a stock’s long-term returns are often driven by the performance of its business.

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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.