Australian Ethical Investment (ASX:AEF) sheds 8.9% this week, as yearly returns fall more in line with earnings growth

By
Simply Wall St
Published
February 21, 2022
ASX:AEF
Source: Shutterstock

Some Australian Ethical Investment Ltd. (ASX:AEF) shareholders are probably rather concerned to see the share price fall 38% over the last three months. But that doesn't undermine the fantastic longer term performance (measured over five years). In fact, during that period, the share price climbed 843%. Impressive! Arguably, the recent fall is to be expected after such a strong rise. The most important thing for savvy investors to consider is whether the underlying business can justify the share price gain. We love happy stories like this one. The company should be really proud of that performance!

Although Australian Ethical Investment has shed AU$93m from its market cap this week, let's take a look at its longer term fundamental trends and see if they've driven returns.

See our latest analysis for Australian Ethical Investment

In his essay The Superinvestors of Graham-and-Doddsville Warren Buffett described how share prices do not always rationally reflect the value of a business. 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.

Over half a decade, Australian Ethical Investment managed to grow its earnings per share at 27% a year. This EPS growth is lower than the 57% average annual increase in the share price. This suggests that market participants hold the company in higher regard, these days. That's not necessarily surprising considering the five-year track record of earnings growth. This favorable sentiment is reflected in its (fairly optimistic) P/E ratio of 86.23.

You can see below how EPS has changed over time (discover the exact values by clicking on the image).

earnings-per-share-growth
ASX:AEF Earnings Per Share Growth February 21st 2022

We're pleased to report that the CEO is remunerated more modestly than most CEOs at similarly capitalized companies. It's always worth keeping an eye on CEO pay, but a more important question is whether the company will grow earnings throughout the years. Before buying or selling a stock, we always recommend a close examination of historic growth trends, available here..

What About Dividends?

When looking at investment returns, it is important to consider the difference between total shareholder return (TSR) and share price return. 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. Arguably, the TSR gives a more comprehensive picture of the return generated by a stock. In the case of Australian Ethical Investment, it has a TSR of 939% for the last 5 years. That exceeds its share price return that we previously mentioned. And there's no prize for guessing that the dividend payments largely explain the divergence!

A Different Perspective

It's good to see that Australian Ethical Investment has rewarded shareholders with a total shareholder return of 23% in the last twelve months. Of course, that includes the dividend. However, that falls short of the 60% TSR per annum it has made for shareholders, each year, over five years. Potential buyers might understandably feel they've missed the opportunity, but it's always possible business is still firing on all cylinders. I find it very interesting to look at share price over the long term as a proxy for business performance. But to truly gain insight, we need to consider other information, too. For instance, we've identified 1 warning sign for Australian Ethical Investment that you should be aware of.

But note: Australian Ethical Investment may not be the best stock to buy. So take a peek at this free list of interesting companies with past earnings growth (and further growth forecast).

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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