Investing in Advanced Drainage Systems (NYSE:WMS) five years ago would have delivered you a 578% gain

Simply Wall St · 05/13 10:16

Buying shares in the best businesses can build meaningful wealth for you and your family. And highest quality companies can see their share prices grow by huge amounts. For example, the Advanced Drainage Systems, Inc. (NYSE:WMS) share price is up a whopping 536% in the last half decade, a handsome return for long term holders. This just goes to show the value creation that some businesses can achieve. Meanwhile the share price is 1.7% higher than it was a week ago. We love happy stories like this one. The company should be really proud of that performance!

So let's assess the underlying fundamentals over the last 5 years and see if they've moved in lock-step with shareholder returns.

View our latest analysis for Advanced Drainage Systems

While markets are a powerful pricing mechanism, share prices reflect investor sentiment, not just underlying business performance. By comparing earnings per share (EPS) and share price changes over time, we can get a feel for how investor attitudes to a company have morphed over time.

During five years of share price growth, Advanced Drainage Systems achieved compound earnings per share (EPS) growth of 42% per year. So the EPS growth rate is rather close to the annualized share price gain of 45% per year. That suggests that the market sentiment around the company hasn't changed much over that time. Rather, the share price has approximately tracked EPS growth.

The image below shows how EPS has tracked over time (if you click on the image you can see greater detail).

earnings-per-share-growth
NYSE:WMS Earnings Per Share Growth May 13th 2024

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. Before buying or selling a stock, we always recommend a close examination of historic growth trends, available here..

What About Dividends?

It is important to consider the total shareholder return, as well as the share price return, for any given stock. The TSR incorporates the value of any spin-offs or discounted capital raisings, along with any dividends, based on the assumption that the dividends are reinvested. So for companies that pay a generous dividend, the TSR is often a lot higher than the share price return. We note that for Advanced Drainage Systems the TSR over the last 5 years was 578%, which is better than the share price return mentioned above. The dividends paid by the company have thusly boosted the total shareholder return.

A Different Perspective

We're pleased to report that Advanced Drainage Systems shareholders have received a total shareholder return of 98% over one year. Of course, that includes the dividend. That's better than the annualised return of 47% over half a decade, implying that the company is doing better recently. In the best case scenario, this may hint at some real business momentum, implying that now could be a great time to delve deeper. 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. For instance, we've identified 2 warning signs for Advanced Drainage Systems that you should be aware of.

But note: Advanced Drainage Systems may not be the best stock to buy. So take a peek at this free list of interesting companies with past earnings growth (and further growth forecast).

Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on American exchanges.