Stock Analysis

Mount Gibson Iron (ASX:MGX) Has Rewarded Shareholders With An Exceptional 487% Total Return On Their Investment

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ASX:MGX
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We think all investors should try to buy and hold high quality multi-year winners. While not every stock performs well, when investors win, they can win big. Just think about the savvy investors who held Mount Gibson Iron Limited (ASX:MGX) shares for the last five years, while they gained 376%. If that doesn't get you thinking about long term investing, we don't know what will. On top of that, the share price is up 27% in about a quarter.

Check out our latest analysis for Mount Gibson Iron

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 imperfect but simple way to consider how the market perception of a company has shifted is to compare the change in the earnings per share (EPS) with the share price movement.

During the last half decade, Mount Gibson Iron became profitable. Sometimes, the start of profitability is a major inflection point that can signal fast earnings growth to come, which in turn justifies very strong share price gains. Given that the company made a profit three years ago, but not five years ago, it is worth looking at the share price returns over the last three years, too. We can see that the Mount Gibson Iron share price is up 102% in the last three years. Meanwhile, EPS is up 47% per year. This EPS growth is higher than the 26% average annual increase in the share price over the same three years. Therefore, it seems the market has moderated its expectations for growth, somewhat. This unenthusiastic sentiment is reflected in the stock's reasonably modest P/E ratio of 11.93.

You can see how EPS has changed over time in the image below (click on the chart to see the exact values).

earnings-per-share-growth
ASX:MGX Earnings Per Share Growth February 12th 2021

It is of course excellent to see how Mount Gibson Iron has grown profits over the years, but the future is more important for shareholders. It might be well worthwhile taking a look at our free report on how its financial position has changed over time.

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. So for companies that pay a generous dividend, the TSR is often a lot higher than the share price return. In the case of Mount Gibson Iron, it has a TSR of 487% for the last 5 years. That exceeds its share price return that we previously mentioned. This is largely a result of its dividend payments!

A Different Perspective

It's good to see that Mount Gibson Iron has rewarded shareholders with a total shareholder return of 14% in the last twelve months. Of course, that includes the dividend. However, the TSR over five years, coming in at 42% per year, is even more impressive. The pessimistic view would be that be that the stock has its best days behind it, but on the other hand the price might simply be moderating while the business itself continues to execute. It's always interesting to track share price performance over the longer term. But to understand Mount Gibson Iron better, we need to consider many other factors. Consider for instance, the ever-present spectre of investment risk. We've identified 3 warning signs with Mount Gibson Iron , and understanding them should be part of your investment process.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies we expect will grow earnings.

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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