When you buy shares in a company, it’s worth keeping in mind the possibility that it could fail, and you could lose your money. 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 Valmet Oyj (HEL:VALMT) share price has soared 210% in the last half decade. Most would be very happy with that. On top of that, the share price is up 22% in about a quarter.
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 imperfect but simple way to consider how the market perception of a company has shifted is to compare the change in the earnings per share (EPS) with the share price movement.
During five years of share price growth, Valmet Oyj achieved compound earnings per share (EPS) growth of 26% per year. This EPS growth is remarkably close to the 25% average annual increase in the share price. Therefore one could conclude that sentiment towards the shares hasn’t morphed very much. In fact, the share price seems to largely reflect the EPS growth.
The image below shows how EPS has tracked over time (if you click on the image you can see greater detail).
We know that Valmet Oyj has improved its bottom line over the last three years, but what does the future have in store? Take a more thorough look at Valmet Oyj’s financial health with this free report on its balance sheet.
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. As it happens, Valmet Oyj’s TSR for the last 5 years was 261%, which exceeds the share price return mentioned earlier. And there’s no prize for guessing that the dividend payments largely explain the divergence!
A Different Perspective
It’s good to see that Valmet Oyj has rewarded shareholders with a total shareholder return of 66% in the last twelve months. Of course, that includes the dividend. That’s better than the annualised return of 29% over half a decade, implying that the company is doing better recently. Someone with an optimistic perspective could view the recent improvement in TSR as indicating that the business itself is getting better with time. It’s always interesting to track share price performance over the longer term. But to understand Valmet Oyj better, we need to consider many other factors. Take risks, for example – Valmet Oyj has 1 warning sign we think you should be aware of.
Of course Valmet Oyj may not be the best stock to buy. So you may wish to see this free collection of growth stocks.
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on FI exchanges.
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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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