Companies that grow revenues and earnings will see share prices grow over time.
- Over the long term, when companies perform well, their shares will do so too.
- When a company's business suffers, the stock will also suffer.
Starbucks has had phenomenal success at turning coffee - a simple product that used to be practically given away - into a premium product that people are willing to pay up for. Starbucks has enjoyed handsome growth in number of stores, profits and share price. Starbucks also has a respectable return on capital of near 11% today.
Meanwhile, Sears has languished. It has had a difficult time competing with discount stores and strip malls, and it has not enjoyed any meaningful profit growth in years. Plus, its return on capital rarely tops 5%. As a result, it stock has bounced around without really going anywhere in decades.
Over the long term
Over the long term, when a company does well, your interest in that company will also do well.
Stocks are ownership interests in companies. Being a stockholder is being a partial owner of a company.
Over the long term, a company's business performance and its share price will converge.
The market rewards companies that earn high returns on capital over a long period.
Companies that earn low returns may get an occasional bounce in the short term, but their long-term performance will be just as miserable as their returns on capital.
The wealth a company creates - as measured by returns on capital - will find its way to shareholders over the long term in the form of dividends or stock appreciation.