Yahoo Finance Downer EDI (ASX:DOW) advances 3.3% this week, taking one-year gains to 15%
Diversification is a key tool for dealing with stock price volatility. But the goal is to pick stocks that do better than average. Downer EDI Limited (ASX:DOW) has done well over the last year, with the stock price up 11% beating the market return of 9.3% (not including dividends). Unfortunately the longer term returns are not so good, with the stock falling 7.9% in the last three years.
Since it's been a strong week for Downer EDI shareholders, let's have a look at trend of the longer term fundamentals.
Check out our latest analysis for Downer EDI
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 way to examine how market sentiment has changed over time is to look at the interaction between a company's share price and its earnings per share (EPS).
Downer EDI went from making a loss to reporting a profit, in the last year.
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).
For starters, we suspect the share price has been buoyed by the dividend, which was increased during the year. Income-seeking investors probably helped bid up the stock price.
You can see below how earnings and revenue have changed over time (discover the exact values by clicking on the image).
It is of course excellent to see how Downer EDI has grown profits over the years, but the future is more important for shareholders. This free interactive report on Downer EDI's balance sheet strength is a great place to start, if you want to investigate the stock further.
What About Dividends?
As well as measuring the share price return, investors should also consider the total shareholder return (TSR). 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. It's fair to say that the TSR gives a more complete picture for stocks that pay a dividend. As it happens, Downer EDI's TSR for the last 1 year was 15%, which exceeds the share price return mentioned earlier. The dividends paid by the company have thusly boosted the total shareholder return.
A Different Perspective
Downer EDI shareholders have received returns of 15% over twelve months (even including dividends), which isn't far from the general market return. Most would be happy with a gain, and it helps that the year's return is actually better than the average return over five years, which was 4%. Even if the share price growth slows down from here, there's a good chance that this is business worth watching in the long term. 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 - Downer EDI has 1 warning sign we think you should be aware of.
Of course Downer EDI 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 AU exchanges.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.
