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It might be of some concern to shareholders to see the FirstGroup plc (LON:FGP) share price down 11% in the last month. But that doesn't change the fact that the returns over the last five years have been very strong. In fact, the share price is 148% higher today. Generally speaking the long term returns will give you a better idea of business quality than short periods can. The more important question is whether the stock is too cheap or too expensive today.
After a strong gain in the past week, it's worth seeing if longer term returns have been driven by improving fundamentals.
We check all companies for important risks. See what we found for FirstGroup in our free report.
To paraphrase Benjamin Graham: Over the short term the market is a voting machine, but over the long term it's a weighing machine. 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 five years of share price growth, FirstGroup moved from a loss to profitability. 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. Given that the company made a profit three years ago, but not five years ago, it is worth looking at the share price returns over the last three years, too. Indeed, the FirstGroup share price has gained 35% in three years. During the same period, EPS grew by 136% each year. This EPS growth is higher than the 11% average annual increase in the share price over the same three years. So you might conclude the market is a little more cautious about the stock, these days. This cautious sentiment is reflected in its (fairly low) P/E ratio of 9.82.
The image below shows how EPS has tracked over time (if you click on the image you can see greater detail).
It is of course excellent to see how FirstGroup has grown profits over the years, but the future is more important for shareholders. You can see how its balance sheet has strengthened (or weakened) over time in this free interactive graphic.
What About Dividends?
It is important to consider the total shareholder return, as well as the share price return, for any given stock. 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 FirstGroup the TSR over the last 5 years was 164%, which is better than the share price return mentioned above. This is largely a result of its dividend payments!