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Passive investing in index funds can generate returns that roughly match the overall market. But if you pick the right individual stocks, you could make more than that. To wit, the Gowing Bros. Limited (ASX:GOW) share price is 97% higher than it was a year ago, much better than the market return of around 22% (not including dividends) in the same period. If it can keep that out-performance up over the long term, investors will do very well! In contrast, the longer term returns are negative, since the share price is 6.6% lower than it was three years ago.
To paraphrase Benjamin Graham: Over the short term the market is a voting machine, but over the long term it's a weighing machine. 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 the last year Gowing Bros grew its earnings per share, moving from a loss to a profit.
When a company is just on the edge of profitability it can be well worth considering other metrics in order to more precisely gauge growth (and therefore understand share price movements).
Gowing Bros' revenue actually dropped 8.5% over last year. So using a snapshot of key business metrics doesn't give us a good picture of why the market is bidding up the stock.
You can see below how earnings and revenue have changed over time (discover the exact values by clicking on the image).
This free interactive report on Gowing Bros' balance sheet strength is a great place to start, if you want to investigate the stock further.
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. So for companies that pay a generous dividend, the TSR is often a lot higher than the share price return. In the case of Gowing Bros, it has a TSR of 105% for the last 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 Gowing Bros shareholders have received a total shareholder return of 105% over one year. That's including the dividend. That certainly beats the loss of about 1.2% per year over the last half decade. The long term loss makes us cautious, but the short term TSR gain certainly hints at a brighter future. While it is well worth considering the different impacts that market conditions can have on the share price, there are other factors that are even more important. For example, we've discovered 4 warning signs for Gowing Bros (2 make us uncomfortable!) that you should be aware of before investing here.
If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on AU exchanges.
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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