Is AutoCanada's (TSE:ACQ) 120% Share Price Increase Well Justified?

When you buy shares in a company, there is always a risk that the price drops to zero. On the other hand, if you find a high quality business to buy (at the right price) you can more than double your money! For example, the AutoCanada Inc. (TSE:ACQ) share price has soared 120% return in just a single year. Also pleasing for shareholders was the 97% gain in the last three months. Zooming out, the stock is actually down 25% in the last three years.

See our latest analysis for AutoCanada

Given that AutoCanada didn't make a profit in the last twelve months, we'll focus on revenue growth to form a quick view of its business development. Shareholders of unprofitable companies usually expect strong revenue growth. As you can imagine, fast revenue growth, when maintained, often leads to fast profit growth.

AutoCanada actually shrunk its revenue over the last year, with a reduction of 3.3%. We're a little surprised to see the share price pop 120% in the last year. This is a good example of how buyers can push up prices even before the fundamental metrics show much growth. Of course, it could be that the market expected this revenue drop.

The image below shows how earnings and revenue have tracked over time (if you click on the image you can see greater detail).

We like that insiders have been buying shares in the last twelve months. Even so, future earnings will be far more important to whether current shareholders make money. So it makes a lot of sense to check out what analysts think AutoCanada will earn in the future (free profit forecasts).

What about the Total Shareholder Return (TSR)?

Investors should note that there's a difference between AutoCanada's total shareholder return (TSR) and its share price change, which we've covered above. Arguably the TSR is a more complete return calculation because it accounts for the value of dividends (as if they were reinvested), along with the hypothetical value of any discounted capital that have been offered to shareholders. Its history of dividend payouts mean that AutoCanada's TSR of 123% over the last year is better than the share price return.

A Different Perspective

It's good to see that AutoCanada has rewarded shareholders with a total shareholder return of 123% in the last twelve months. Notably the five-year annualised TSR loss of 3.7% per year compares very unfavourably with the recent share price performance. The long term loss makes us cautious, but the short term TSR gain certainly hints at a brighter future. While it is well worth considering the different impacts that market conditions can have on the share price, there are other factors that are even more important. Consider for instance, the ever-present spectre of investment risk. We've identified 2 warning signs with AutoCanada (at least 1 which doesn't sit too well with us) , and understanding them should be part of your investment process.

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 CA exchanges.

This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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