One simple way to benefit from the stock market is to buy an index fund. But if you choose individual stocks with prowess, you can make superior returns. For example, Scales Corporation Limited (NZSE:SCL) shareholders have seen the share price rise 94% over three years, well in excess of the market return (25%, not including dividends). However, more recent returns haven’t been as impressive as that, with the stock returning just 11% in the last year, including dividends.
While markets are a powerful pricing mechanism, share prices reflect investor sentiment, not just underlying business performance. By comparing earnings per share (EPS) and share price changes over time, we can get a feel for how investor attitudes to a company have morphed over time.
During the three years of share price growth, Scales actually saw its earnings per share (EPS) drop 7.3% per year. So we doubt that the market is looking to EPS for its main judge of the company’s value. Therefore, we think it’s worth considering other metrics as well.
It may well be that Scales revenue growth rate of 8.9% over three years has convinced shareholders to believe in a brighter future. If the company is being managed for the long term good, today’s shareholders might be right to hold on.
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.
We know that Scales has improved its bottom line lately, but what does the future have in store? So we recommend checking out this free report showing consensus forecasts
What About Dividends?
As well as measuring the share price return, investors should also consider the total shareholder return (TSR). 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. Arguably, the TSR gives a more comprehensive picture of the return generated by a stock. We note that for Scales the TSR over the last 3 years was 127%, which is better than the share price return mentioned above. And there’s no prize for guessing that the dividend payments largely explain the divergence!
A Different Perspective
Scales shareholders have gained 11% over twelve months (even including dividends). This isn’t far from the market return of 11%. It has to be noted that the recent return falls short of the 31% shareholders have gained each year, over the last three years. Share price gains are anything but steady, so it’s a positive to see that the longer term returns are reasonable. Before forming an opinion on Scales you might want to consider the cold hard cash it pays as a dividend. This free chart tracks its dividend over time.
We will like Scales 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 NZ 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 email@example.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.