Why Have QAF Limited’s Shares Gained 183% 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 food producer QAF Limited (SGX: Q01) over its last five fiscal years and also track the total return of its stock over the past five years. The total return takes into account the gains from reinvested dividends.

Here’s a table showing some of QAF’s business numbers from 2011 to 2015:

Source: S&P Global Market Intelligence

You can see that QAF’s revenue has barely grown from 2011 to 2015. Over the same period, its earnings per share also fell by 19%.

The company’s return on equity fell as well, while its gearing dipped by a much lower percentage. Gearing is a gauge for the level of financial risk that a company is taking on and a company can actually increase its return on equity by pushing up its gearing. QAF’s lower gearing has had a role to play in its lower return on equity.

On the whole, QAF is a company that has not shown any growth in its last five fiscal years. Its economic quality – as represented by the return on equity – has also deteriorated.

But here’s something interesting. In the five years ended 1 December 2016, QAF’s share price actually grew by 118%. When dividends are factored in, QAF’s total return vaults to 183%.

This illustrates two important lessons. Firstly, five years ago, QAF was valued at merely 5.2 times trailing earnings; this low PE ratio could have set the stage for QAF’s aforementioned 118% share price gain. Secondly, dividends can be an important source of return for investors. Do not forget about it.

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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.