In This Article:
The simplest way to invest in stocks is to buy exchange traded funds. But if you pick the right individual stocks, you could make more than that. To wit, the Litigation Capital Management Limited (LON:LIT) share price is 41% higher than it was a year ago, much better than the market return of around 6.5% (not including dividends) in the same period. If it can keep that out-performance up over the long term, investors will do very well! However, the stock hasn't done so well in the longer term, with the stock only up 10% in three years.
So let's investigate and see if the longer term performance of the company has been in line with the underlying business' progress.
View our latest analysis for Litigation Capital Management
In his essay The Superinvestors of Graham-and-Doddsville Warren Buffett described how share prices do not always rationally reflect the value of a business. 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.
Litigation Capital Management was able to grow EPS by 38% in the last twelve months. This EPS growth is reasonably close to the 41% increase in the share price. This makes us think the market hasn't really changed its sentiment around the company, in the last year. It makes intuitive sense that the share price and EPS would grow at similar rates.
You can see below how EPS has changed over time (discover the exact values by clicking on the image).
Dive deeper into Litigation Capital Management's key metrics by checking this interactive graph of Litigation Capital Management's earnings, revenue and cash flow.
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 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. In the case of Litigation Capital Management, it has a TSR of 44% for the last 1 year. 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
We're pleased to report that Litigation Capital Management shareholders have received a total shareholder return of 44% over one year. Of course, that includes the dividend. Since the one-year TSR is better than the five-year TSR (the latter coming in at 3% per year), it would seem that the stock's performance has improved in recent times. Someone with an optimistic perspective could view the recent improvement in TSR as indicating that the business itself is getting better with time. 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. For example, we've discovered 2 warning signs for Litigation Capital Management that you should be aware of before investing here.