In This Article:
Investing in stocks inevitably means buying into some companies that perform poorly. Long term Croda International Plc (LON:CRDA) shareholders know that all too well, since the share price is down considerably over three years. Unfortunately, they have held through a 65% decline in the share price in that time. And the ride hasn't got any smoother in recent times over the last year, with the price 44% lower in that time. Shareholders have had an even rougher run lately, with the share price down 14% in the last 90 days.
So let's have a look and see if the longer term performance of the company has been in line with the underlying business' progress.
We've discovered 1 warning sign about Croda International. View them for free.
While markets are a powerful pricing mechanism, share prices reflect investor sentiment, not just underlying business performance. One flawed but reasonable way to assess how sentiment around a company has changed is to compare the earnings per share (EPS) with the share price.
Croda International saw its EPS decline at a compound rate of 21% per year, over the last three years. This reduction in EPS is slower than the 29% annual reduction in the share price. So it seems the market was too confident about the business, in the past.
The image below shows how EPS has tracked over time (if you click on the image you can see greater detail).
We consider it positive that insiders have made significant purchases in the last year. Even so, future earnings will be far more important to whether current shareholders make money. Dive deeper into the earnings by checking this interactive graph of Croda International's earnings, revenue and cash flow.
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 and spin-offs. Arguably, the TSR gives a more comprehensive picture of the return generated by a stock. We note that for Croda International the TSR over the last 3 years was -62%, which is better than the share price return mentioned above. The dividends paid by the company have thusly boosted the total shareholder return.
A Different Perspective
Investors in Croda International had a tough year, with a total loss of 41% (including dividends), against a market gain of about 3.6%. Even the share prices of good stocks drop sometimes, but we want to see improvements in the fundamental metrics of a business, before getting too interested. Unfortunately, last year's performance may indicate unresolved challenges, given that it was worse than the annualised loss of 6% over the last half decade. We realise that Baron Rothschild has said investors should "buy when there is blood on the streets", but we caution that investors should first be sure they are buying a high quality business. I find it very interesting to look at share price over the long term as a proxy for business performance. But to truly gain insight, we need to consider other information, too. Consider for instance, the ever-present spectre of investment risk. We've identified 1 warning sign with Croda International , and understanding them should be part of your investment process.