Investing in a company listed on the ASX can often mean having to accept large, short-term swings in the value of your investment. This has been the case for shareholders of ARB Corporation Limited (ASX: ARB) over the past 12 months. From July to January, the ARB share price fell more than 35% to a 12-month low of $14.55. The stock price has since rebounded, rising to $18.61 per share at last close.
ARB is market leader in the manufacture and distribution of 4X4 accessories and has consistently demonstrated growth in sales and earnings. The company also has no debt. These factors make it understandable why some investors might have taken the opportunity to invest in ARB as its share price fell.
Investing when the share price was at its lowest would have meant a tidy short-term gain of approximately 27% today for the investor. Although I’m disappointed to have missed on this quick profit, I think the decision to not invest is still easily justifiable.
A closer look at ARB’s financial performance
When looking at the financials of ARB there is one key factor that concerns me about a potential long-term investment. This concern relates to return on equity. Since 2011, ARB has averaged a rate of over 20% under this measure. This is an impressive achievement. However, when looking more closely we can also see that in each year since 2011, this rate has declined.
Falling return on equity is a worrying trend for shareholders. It indicates that as the company has grown, the additional equity has not yet been able to be used to generate returns equivalent to that of the past. If this trend continues it will be detrimental to the value of ARB, the ARB share price, and the returns of its investors.
At its current share price, it appears to me that investors are confident in ARB’s ability to turn around the trend of declining return on equity. Unless this confidence waivers and the share price falls, I don’t see an opportunity for investment. If the trend stabilises or reverses, this may change. Although not investing in ARB will mean missing out on any potential gains, it will also ensure that capital is preserved for future opportunities.
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Motley Fool contributor Mitchell Perry has no position in any of the stocks mentioned. The Motley Fool Australia has recommended ARB Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.