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Why Have BreadTalk Group Limited’s Shares Gained 125% In Value In The Last 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 take a quick look at the business performance of food & beverage retail store operator BreadTalk Group Limited (SGX: 5DA) over its last five fiscal years and track the total return of its stock. The total return factors in the gains from reinvested dividends.

The following is a table showing some of BreadTalk’s important business numbers from 2011 to 2015:

breadtalk-business-results-table-lawrence
Source: S&P Global Market Intelligence

One striking thing is the company’s revenue growth. From 2011 to 2015, BreadTalk’s top-line had expanded by 71%. But, its earnings per share had fallen from S$0.0412 to S$0.027.

Meanwhile, BreadTalk’s return on equity has declined significantly as well, from 15.8% to just 6.0%. This has happened despite the company’s gearing soaring from 47% to 138%; in general, a company can increase its return on equity by increasing its gearing, all other things being equal.

But interestingly, BreadTalk’s share price has jumped by 103% in the five years ended 26 September 2016. If gains from reinvested dividends are included, BreadTalk’s total return comes in even higher at 125%.

Perhaps the market is rewarding the company’s strong revenue growth. Investors may want to watch for BreadTalk’s ability to generate higher profit in the future. The company could still be ramping up its operations in newer food & beverage outlets; new stores may require a gestation period before they can operate at an optimum level and bring in profits.

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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.