educatief

Key data: the relationship between a company’s results and its stock price

A stock represents a piece of a company. In order to successfully invest it is imperative to know the relationship between company results and stock prices. Every investor should know how to make this distinction. Such insight is necessary in order to systematically beat the market.

The progression of the stock price is mainly driven by Earnings per Share (EPS). A period when the stock price rises faster than EPS will always be followed by a period when the price falls, stabilizes or increases at a slower rate than EPS. In the extreme long term stock price evolves parallel to EPS.

Results in the past

The management and the resources that the management has access to can best be assessed based on the results that the management has achieved with those resources in the past. It is not only the earnings growth of a business that is important but also the growth of other key elements that the management will need to rely on in order to secure future growth.

In the extreme long term

The progression of the stock price is mainly driven by EPS. A period when the stock price rises faster than EPS will always be followed by a period when the price falls, stabilizes or increases at a slower rate than EPS. In the extreme long term stock price evolves parallel to EPS.

The key data discussed gives a very good insight into a company. The illustrations showing the growth of the company fundamentals and the stock price not only provide a good impression of the state and growth of a business but also a pretty accurate idea of a company’s future prospects. Each of the items discussed is individually weighted and calculated as part of the Future Price Channel®.

The economic climate

Of course the economic climate also influences a company’s revenue as well as its profit margin. If competition intensifies then the profit margin decreases together with the profit, even if the revenue stays the same.

Obviously interest, inflation, efficiency, employment rates et cetera influence the course of business and therefore one must consider the economic cycle when estimating future EPS.