By purchasing an index fund, investors can approximate the average performance of the market. But if you buy good businesses at attractive prices, your portfolio returns could outperform the average market return. For example, Ramsdens Holdings PLC (LON:RFX) shareholders have seen the share price rise 42% in three years, well above the market decline (2.0%, not including dividends). However, more recent returns haven’t been as impressive: The stock returned just 21% over the past year, including dividends.
Now it’s also worth taking a look at the company’s fundamentals, because that will help us determine whether the long-term shareholder returns have matched the underlying business performance.
View our latest analysis for Ramsdens Holdings
While markets are a powerful pricing mechanism, stock prices reflect investor sentiment, not just underlying business performance. An imperfect but simple way to consider how the market perception of a company has changed is to compare the change in the earnings per share (EPS) with the share price movement.
Ramsdens Holdings was able to grow its EPS by 181% annually over three years, driving up the share price. This EPS growth is higher than the 12% average annual increase in the share price. Therefore, it appears that investors have become more cautious about the company over time. This cautious sentiment is reflected in its (fairly low) P/E ratio of 9.07.
The chart below shows how EPS has changed over time (unveil the exact values by clicking on the image).
Of course, it’s great to see how Ramsdens Holdings has grown its profits over the years, but the future is more important for shareholders. Take a closer look at the financial health of Ramsdens Holdings with this free balance sheet report.
It is important to consider the total shareholder return, as well as the share price return, for any given stock. While 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 usually much higher than the share price return. In the case of Ramsdens Holdings, it has a TSR of 59% over the last 3 years. That beats its share price performance we mentioned earlier. This is largely due to their dividend payments!
It’s good to see that Ramsdens Holdings shareholders have received a total shareholder return of 21% over the last year. That includes the dividend. Given that the one-year TSR is better than the five-year TSR (the latter at 1.4% per year), it would seem that the stock’s performance has improved recently. At best, this can indicate real business momentum, implying that now might be a good time to dig deeper. I find it very interesting to look at share price over the long term as an indicator of business performance. But to gain true understanding, we must consider other information as well. For example, we have discovered Two warning signs for Ramsdens Holdings What you should take into account before investing here.