Venture Corporation Ltd’s Shares Are Up By 15% in 1 Year: Here’s What Happened

Shares of Venture Corporation Ltd (SGX: V03) have seen their price climb by 15% over the past year. What has happened?

A simple framework

To help with this, I would like to defer to a couple of paragraphs from The Little Book that Builds Wealth by author and fund manager Pat Dorsey:

“Over long stretches of time, there are just two things that push a stock up or down: The investment return, driven by earnings growth and dividends, and the speculative return, driven by changes in the price-earnings (P/E) ratio.

Think of the investment return as reflecting a company’s financial performance, and the speculative return as reflecting the exuberance or pessimism of other investors.”

Under Dorsey’s framework, a stock’s price returns can be made out entirely of the investment return component, entirely of the speculative return component, or a mixture of both components.

For the Foolish investor, understanding the right reason is important. If we can determine the reason, we may get an inkling on whether the movement in a stock’s price is deserved or undeserved.

Deciphering the moving pieces

We can track the investment or speculative components of a stock’s return by noting down changes in its financial metrics such as its earnings per share (EPS) and price to earnings ratio (PE ratio). On a related side note, such notes could also be a simple way for you to track the progress of a company over time and can form part of your investment journal entries.

Coming back to Venture, the table below shows changes to the company’s EPS, PE ratio, and share price over the last 12 months:

Source: Google Finance; company’s earnings report

Turns out, Venture’s EPS has more than doubled over the past year. But, it’s worth noting that the company’s 2014 EPS was restated to 27.7 cents in 2015. Prior to the restatement, the 2014 EPS was 50.9 cents. So, the sharp increase in EPS was in large part due to the restatement.

Venture’s latest results (for the quarter ended 30 June 2016) showed growth. Revenue was up 3.4% year-on-year while profit jumped by 20.3%. Venture also generated $22 million in free cash flow for the quarter and had a net cash position of around $285 million, as of 30 June 2016.

Foolish takeaway

If a stock’s price rises (or falls), we should try to understand if it is backed by a company’s fundamental growth (or decline), or whether it is simply a result of investor exuberance (or pessimism).

When we understand the difference, we may become a better judge on whether a stock’s price gains (losses) are justified – with commensurate growth (decline) in earnings – or something that happened as a result of the market’s irrationality. Such knowledge can help us with our decision making.

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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 Chin Hui Leong doesn’t own shares in any companies mentioned.