While it may not be enough for some shareholders, we think it is good to see the Narayana Hrudayalaya Limited (NSE:NH) share price up 25% in a single quarter. But that doesn't help the fact that the three year return is less impressive. Truth be told the share price declined 23% in three years and that return, Dear Reader, falls short of what you could have got from passive investing with an index fund.
In his essay The Superinvestors of Graham-and-Doddsville Warren Buffett described how share prices do not always rationally reflect the value of a business. One imperfect but simple way to consider how the market perception of a company has shifted is to compare the change in the earnings per share (EPS) with the share price movement.
Although the share price is down over three years, Narayana Hrudayalaya actually managed to grow EPS by 38% per year in that time. This is quite a puzzle, and suggests there might be something temporarily buoying the share price. Alternatively, growth expectations may have been unreasonable in the past. Since the change in EPS doesn't seem to correlate with the change in share price, it's worth taking a look at other metrics.
With a rather small yield of just 0.4% we doubt that the stock's share price is based on its dividend. We note that, in three years, revenue has actually grown at a 20% annual rate, so that doesn't seem to be a reason to sell shares. This analysis is just perfunctory, but it might be worth researching Narayana Hrudayalaya more closely, as sometimes stocks fall unfairly. This could present an opportunity.
The image below shows how earnings and revenue have tracked over time (if you click on the image you can see greater detail).
It's probably worth noting that the CEO is paid less than the median at similar sized companies. It's always worth keeping an eye on CEO pay, but a more important question is whether the company will grow earnings throughout the years. You can see what analysts are predicting for Narayana Hrudayalaya in this interactive graph of future profit estimates.
A Different Perspective
Narayana Hrudayalaya shareholders may not have made money over the last year, but their total loss of 5.8% ( including dividends) isn't as bad as the market loss of around 5.8%. Furthermore, the stock lost shareholders 8.3% per year over three years, so the one-year return was better in a relative sense. It is of course not much comfort to know that the losses have slowed. Shareholders will be hoping for a proper turnaround, no doubt. Before forming an opinion on Narayana Hrudayalaya you might want to consider these 3 valuation metrics.
If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on IN exchanges.
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