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Why Have CWT Ltd’s Shares Gained 114% 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 look at the business performance of CWT Ltd (SGX: C14) over its last five fiscal years and track the total return of its stock. As a quick background, CWT is a logistics company that was founded in 1970. It is the largest home-grown logistics services provider in Singapore.

Here’s a table showing the company’s business numbers:

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

You can see that CWT’s revenue has increased by 285% in total from 2011 to 2015 while its operating income is up by 155%. That’s also why the company’s operating income margin had fallen from 2.1% to 1.4%.

Meanwhile, its return on equity had increased from only 12.6% to 13.6% from 2011 to 2015. The return on equity measures a company’s ability to generate a profit from the shareholder’s capital it is; in general, the higher it is, the better it could be. But, it’s also worth noting that the return on equity can be inflated through the use of higher borrowings. This brings me to CWT’s gearing.

The table shows that CWT’s gearing has surged from 78.8% in 2011 to 165% in 2015. And yet, the company’s return on equity has not increased.

As a whole, the company has been growing its top-line and bottom-line rapidly. But, its growth was driven by an increase in gearing and reduction in margin and that’s something investors may want to keep in mind. Over the five years ended 10 November 2016, CWT has seen its share price grow by 89%. When dividends are included, the company’s total return climbs to 114%. It’s likely that the market has recognised CWT’s operating income growth.

CWT’s experience reinforces the idea that a stock’s price is often driven by the performance of its business over the long-term; CWT’s stock price had likely moved up to reflect its improvements in generating operating income. Meanwhile, it’s also worth keeping in mind that dividends can be an important component of a stock’s return.

If you like what you’ve seen, you can get even more investing insights and analyses from The Motley Fool’s weekly investing newsletter Take Stock Singapore. It’s FREE, so do check it out here.

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If you like what you've seen, you can get even more investing insights and analyses from The Motley Fool's weekly investing newsletter Take Stock Singapore. It's FREE, so do check it out here.

Also, like us on Facebook to follow our latest news and articles. The Motley Fool's purpose is to help the world invest, better.

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.