Should Sophos Group Be Disappointed With Their 68% Profit?

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By buying an index fund, investors can approximate the average market return. But many of us dare to dream of bigger returns, and build a portfolio ourselves. For example, the Sophos Group plc (LON:SOPH) share price is up 68% in the last three years, clearly besting than the market return of around 35%.

See our latest analysis for Sophos Group

Sophos Group isn’t yet profitable, so most analysts would look to revenue growth to get an idea of how fast the underlying business is growing. When a company doesn’t yet make profits, we’d generally expect to see good revenue growth. As you can imagine, fast revenue growth, when maintained, often leads to fast profit growth.

In the last 3 years Sophos Group saw its revenue grow at 14% per year. That’s pretty nice growth. While the share price has done well, compounding at 19% yearly, over three years, that move doesn’t seem over the top. If that’s the case, then it could be well worth while to research the growth trajectory. Keep in mind that the strength of the balance sheet impacts the options open to the company.

Depicted in the graphic below, you’ll see revenue and earnings over time. If you want more detail, you can click on the chart itself.

LSE:SOPH Income Statement, February 22nd 2019
LSE:SOPH Income Statement, February 22nd 2019

Sophos Group is well known by investors, and plenty of clever analysts have tried to predict the future profit levels. So it makes a lot of sense to check out what analysts think Sophos Group will earn in the future (free analyst consensus estimates)

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 is a return calculation that accounts for the value of cash dividends (assuming that any dividend received was reinvested) and the calculated value of any discounted capital raisings. It’s fair to say that the TSR gives a more complete picture for stocks that pay a dividend. As it happens, Sophos Group’s TSR for the last 3 years was 72%, which exceeds the share price return mentioned earlier. And there’s no prize for guessing that the dividend payments largely explain the divergence!

A Different Perspective

The last twelve months weren’t great for Sophos Group shares, which cost holders 32%, including dividends, while the market was up about 1.1%. Of course the long term matters more than the short term, and even great stocks will sometimes have a poor year. Investors are up over three years, booking 20% per year, much better than the more recent returns. Sometimes when a good quality long term winner has a weak period, it’s turns out to be an opportunity, but you really need to be sure that the quality is there. Before spending more time on Sophos Group it might be wise to click here to see if insiders have been buying or selling shares.

If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.

Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on GB exchanges.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.