Why Have Sembcorp Industries Limited’s Shares Lost 15% 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 study the historical business performance of Sembcorp Industries Limited (SGX: U96) and track the total return of its stock (the total return includes gains from reinvested dividends).

The following table plots some of Sembcorp Industries Limited’s business numbers from 2011 to 2015:

Source: S&P Global Market Intelligence

Here are some noteworthy points:

  • While the company’s revenue had stepped up slightly between 2011 and 2015, its profit has fallen drastically.
  • Its return on equity has also declined by over half in the same period. The return on equity measures a company’s ability to generate a profit with the shareholder’s capital it has. It can also be juiced up through higher leverage (a higher leverage can be observed through higher gearing).
  • As the table shows, Sembcorp Industries’ gearing has increased by a fair bit from 39% to 85% from 2011 to 2015, but this has not stemmed the slide in its return on equity.

A big part of Sembcorp Industries’ business difficulties is due to the significant drop in oil prices seen in the past two years. This has resulted in lower capital spending in the oil and gas industry, which has significantly impacted the marine and offshore engineering arm of Sembcorp Industries.

In the five years ended 13 September 2016, Sembcorp Industries’ share price has fallen by 29%. When dividends are factored in, the company’s total return improves to a slightly stronger but still negative 15%.

This helps drive home the important idea that a company’s share price is often governed by the performance of its underlying business over the long-term.

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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.