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When you buy a stock there is always a possibility that it could drop 100%. But on the bright side, if you buy shares in a high quality company at the right price, you can gain well over 100%. For example, the Drax Group plc (LON:DRX) share price has soared 209% in the last half decade. Most would be very happy with that. Better yet, the share price has risen 5.7% in the last week.
After a strong gain in the past week, it's worth seeing if longer term returns have been driven by improving fundamentals.
Our free stock report includes 3 warning signs investors should be aware of before investing in Drax Group. Read for free now.
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 last half decade, Drax Group 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. Since the company was unprofitable five years ago, but not three years ago, it's worth taking a look at the returns in the last three years, too. We can see that the Drax Group share price is down 23% in the last three years. During the same period, EPS grew by 119% each year. So there seems to be a mismatch between the positive EPS growth and the change in the share price, which is down -8% per year.
The company's earnings per share (over time) is depicted in the image below (click to see the exact numbers).
We consider it positive that insiders have made significant purchases in the last year. Having said that, most people consider earnings and revenue growth trends to be a more meaningful guide to the business. Before buying or selling a stock, we always recommend a close examination of historic growth trends, available here..
What About Dividends?
As well as measuring the share price return, investors should also consider the total shareholder return (TSR). 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. It's fair to say that the TSR gives a more complete picture for stocks that pay a dividend. We note that for Drax Group the TSR over the last 5 years was 277%, which is better than the share price return mentioned above. This is largely a result of its dividend payments!