In This Article:
The simplest way to invest in stocks is to buy exchange traded funds. But the truth is, you can make significant gains if you buy good quality businesses at the right price. For example, the Metcash Limited (ASX:MTS) share price is up 24% in the last five years, slightly above the market return. Zooming in, the stock is actually down 4.3% in the last year.
So let's assess the underlying fundamentals over the last 5 years and see if they've moved in lock-step with shareholder returns.
Check out our latest analysis for Metcash
To quote Buffett, 'Ships will sail around the world but the Flat Earth Society will flourish. There will continue to be wide discrepancies between price and value in the marketplace...' 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.
During five years of share price growth, Metcash achieved compound earnings per share (EPS) growth of 2.4% per year. This EPS growth is lower than the 4% average annual increase in the share price. This suggests that market participants hold the company in higher regard, these days. That's not necessarily surprising considering the five-year track record of earnings growth.
The image below shows how EPS has tracked over time (if you click on the image you can see greater detail).
Dive deeper into Metcash's key metrics by checking this interactive graph of Metcash'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. 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 or spin-off. So for companies that pay a generous dividend, the TSR is often a lot higher than the share price return. In the case of Metcash, it has a TSR of 59% for the last 5 years. That exceeds its share price return that we previously mentioned. This is largely a result of its dividend payments!
A Different Perspective
Metcash shareholders are up 1.1% for the year (even including dividends). But that return falls short of the market. It's probably a good sign that the company has an even better long term track record, having provided shareholders with an annual TSR of 10% over five years. It's quite possible the business continues to execute with prowess, even as the share price gains are slowing. 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. Take risks, for example - Metcash has 2 warning signs we think you should be aware of.