Unfortunately, investing is risky - companies can and do go bankrupt. On the other hand, if you find a high quality business to buy (at the right price) you can more than double your money! For example, the ARB Corporation Limited (ASX:ARB) share price has soared 167% return in just a single year. On top of that, the share price is up 12% in about a quarter. And shareholders have also done well over the long term, with an increase of 79% in the last three years.
While the efficient markets hypothesis continues to be taught by some, it has been proven that markets are over-reactive dynamic systems, and investors are not always rational. One flawed but reasonable way to assess how sentiment around a company has changed is to compare the earnings per share (EPS) with the share price.
ARB was able to grow EPS by 55% in the last twelve months. The share price gain of 167% certainly outpaced the EPS growth. So it's fair to assume the market has a higher opinion of the business than it a year ago.
The image below shows how EPS has tracked over time (if you click on the image you can see greater detail).
We're pleased to report that the CEO is remunerated more modestly than most CEOs at similarly capitalized companies. But while CEO remuneration is always worth checking, the really important question is whether the company can grow earnings going forward. Before buying or selling a stock, we always recommend a close examination of historic growth trends, available here..
What About Dividends?
As well as measuring the share price return, investors should also consider the total shareholder return (TSR). The TSR incorporates the value of any spin-offs or discounted capital raisings, along with any dividends, based on the assumption that the dividends are reinvested. So for companies that pay a generous dividend, the TSR is often a lot higher than the share price return. We note that for ARB the TSR over the last year was 171%, which is better than the share price return mentioned above. This is largely a result of its dividend payments!
A Different Perspective
It's nice to see that ARB shareholders have received a total shareholder return of 171% over the last year. Of course, that includes the dividend. That's better than the annualised return of 21% over half a decade, implying that the company is doing better recently. In the best case scenario, this may hint at some real business momentum, implying that now could be a great time to delve deeper. Is ARB cheap compared to other companies? These 3 valuation measures might help you decide.
We will like ARB better if we see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on AU exchanges.
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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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