Vicom Limited’s Shares Are Down 6.3% in 1 Year: Here’s What Happened

Shares of vehicle testing and inspection company Vicom Limited (SGX: V01) are down by 6.3% in one year.

Why has that 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.

In the table below, I have summarized changes in Vicom’s EPS, PE ratio, and share price over the past year:

Source: Google Finance; Company’s earnings report

Turns out, the fall in Vicom’s share price can be traced to a lower EPS recorded over the past year. The company’s PE ratio, by comparison, had dipped by just 1.1% in the last 12 months.

In Vicom’s latest quarter (the three months ended 30 June 2016), its top-line and bottom-line both hit a speedbump.

Revenue was down almost 7% while profit retreated by 12.6% year-on-year. The vehicle testing and inspection unit also had to cut its interim dividend to 8 cents per share, down from the 8.75 cents per share recorded in the previous year. Lower business volumes and a higher rate of vehicle deregistration had led to lower sales.

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 owns shares in Vicom.