Did Business Growth Power Varun Beverages' (NSE:VBL) Share Price Gain of 135%?

The worst result, after buying shares in a company (assuming no leverage), would be if you lose all the money you put in. But when you pick a company that is really flourishing, you can make more than 100%. For example, the Varun Beverages Limited (NSE:VBL) share price has soared 135% in the last three years. Most would be happy with that. On top of that, the share price is up 25% in about a quarter. But this move may well have been assisted by the reasonably buoyant market (up 15% in 90 days).

Check out our latest analysis for Varun Beverages

To quote Buffett, 'Ships will sail around the world but the Flat Earth Society will flourish. There will continue to be wide discrepancies between price and value in the marketplace...' 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 three years of share price growth, Varun Beverages achieved compound earnings per share growth of 20% per year. In comparison, the 33% per year gain in the share price outpaces the EPS growth. This suggests that, as the business progressed over the last few years, it gained the confidence of market participants. That's not necessarily surprising considering the three-year track record of earnings growth. This optimism is also reflected in the fairly generous P/E ratio of 78.62.

The company's earnings per share (over time) is depicted in the image below (click to see the exact numbers).

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. Whereas the share price return only reflects the change in the share price, the TSR includes the value of dividends (assuming they were reinvested) and the benefit of any discounted capital raising or spin-off. Arguably, the TSR gives a more comprehensive picture of the return generated by a stock. In the case of Varun Beverages, it has a TSR of 138% for the last 3 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

Varun Beverages shareholders have gained 58% over twelve months (even including dividends). This isn't far from the market return of 56%. That's not at all bad, but the cherry on top is that it's an improvement on prior returns (since shareholders only made 33% yearly over the last three years). We're certainly happy to see the uptick and we hope the underlying business goes on to justify the improved valuation. It's always interesting to track share price performance over the longer term. But to understand Varun Beverages better, we need to consider many other factors. Even so, be aware that Varun Beverages is showing 2 warning signs in our investment analysis , you should know about...

We will like Varun Beverages 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 IN 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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