For anyone who buys shares in growing profitable companies with the view to holding on to them for the long haul — ie, at least 5 years but preferably longer — it's a wonderful experience to witness, and benefit from, their prosperity.
Of course, such success should usually be reflected in the company's share price and a good example of that is Integrated Research Limited (ASX: IRI) which has seen its stock hit 12 month highs recently.
Long-term Motley Fool Share Advisor members who acted on our first ever recommendation back in late 2012 to buy shares in Integrated Research — and who have held their shares ever since — should be pleased with the outcome with the stock up over 800% since then.
But what's a good story without at least learning why Integrated Research and similar companies continue to perform?
Analysing a company can be complicated and no matter how detailed one's analysis is, there's still an amount of guesswork as to how a company will perform in the future.
In Integrated Research's case, it hasn't been plain sailing either with the CEO changing twice in the last five years, and its share price remaining relatively flat between 2012 and early 2015 testing long-term shareholders' patience.
But in my view, it's the company's fundamentals that are important.
Fundamentals such as:
- (growing) revenues,
- (growing) earnings-per-share (EPS),
- (high) returns on shareholders' equity (ROE), and
- (high) net margins
There are myriad number of ways to evaluate a company and whether it's on the right trajectory. One of these I wrote about here which discusses the importance of buying into businesses that are founder-led.
But, in an attempt to keep things simple, I examined Integrated Research and four other companies, and measured their returns to shareholders which you can see here:
| Company | Per annum returns since 11 July 2012 | $10,000 is now worth … |
| Integrated Research Limited (ASX: IRI) | 39.08% | $42,080 |
| Webjet Limited (ASX: WEB) | 30.43% | $27,761 |
| Corporate Travel Management Ltd (ASX: CTD) | 63.18% | $105,837 |
| Aristocrat Leisure Limited (ASX: ALL) | 54.01% | $76,725 |
| Cochlear Limited (ASX: COH) | 20.90% | $15,792 |
And you can add to the mix a consistent stream of dividends (included in the above return figures) which will please those investors seeking a consistent and rising income stream, even if the starting yield is quite small.
It's not all plain sailing though
Don't for one minute imagine that any of these returns were achieved easily over the last five years.
Webjet's net margins and growth in diluted EPS have varied quite a lot but it's revenue growth has been astounding. Despite these sterling results enjoyed by shareholders, Webjet's share price languished between April 2013 and September 2015.
Aristocrat's net margins have also jumped up and down over the last five years, but as well as consistently strong growth in earnings it's been able to provide shareholders with rising EPS and a reasonably consistent ROE.
Cochlear reported strong revenue growth, consecutive strong rises in EPS, and consistently high ROEs. Net margins have fluctuated though — which can be construed as a negative — but they seem to have stabilised in the mid-teens for now.
And then there's Corporate Travel Management's revenue growth which has been astounding and which has allowed it to report strong EPS growth despite a falling ROE.
Foolish takeaway
Companies and the environments they operate in are never simple and there are many other metrics one could use to evaluate a company. However, the ones I've referred to here, I believe, help shareholders to understand the basics of a company and go part of the way to explaining why a company's stock performs the way it does.
Despite the excellent share price and dividend performance of each of these companies to date, I firmly believe in their future prospects and believe that readers who approach their investing with a long-term mindset will continue to do well from here.
But it will be up to each reader to study and consider the risks of each company, determine their own level of comfort with these risks, and then decide whether they believe each has a place in their portfolio.
I recommend taking a 5+ year investment horizon to help mitigate the effects of share price volatility, and allow your chosen company the opportunity to bear you the financial fruit you're after.
