What Is Total Shareholder Return?
Total Shareholder Return (TSR) is an indicator of the performance of the stock return over a period for which it is held. The return includes a capital appreciation of the stock and the dividend earned on the stock. And is expressed in percentage terms.
It helps evaluate the investment performance and is calculated by comparing the current stoc price with the price paid during purchase. It represents the financial benefit that the stock is able to generate for the investor and is also an indicator of the company’s performance.
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Total Shareholder Return Explained
Total shareholder return charts take into account two components of return: capital appreciationCapital AppreciationCapital appreciation refers to an increase in the market value of assets relative to their purchase price over a specified time period. Stocks, land, buildings, fixed assets, and other types of owned property are examples of assets. and dividend received on the stock since the time stock was purchased. Thus, it provides the investor with information regarding the stock’s total growth over time. It is very easy to understand and can be used by the investor to evaluate the performance of the stock by comparing the same with other stocks of companies operating in similar industries using the same benchmark. Also, based on this total shareholder return analysis, the investor can conclude whether it is feasible to remain invested in the stock or he shall take exit from the stock.
Let us see how to calculate total shareholder return. Total shareholder return for a particular stock can be determined using the following formula.
TSR = Current Price – Purchase Price + Dividend / Purchase Price
- Current Price = Price at which stock is trading currently
- Purchase Price = Price at which stock is acquired
- Dividend = Dividend received during the year
Thus, to calculate the TSR for a year, the sum of the change in stock price and the dividendDividendDividends refer to the portion of business earnings paid to the shareholders as gratitude for investing in the company’s equity. received is divided by the purchase price of the stock and is expressed as a percentage.
Let us have a look at an example of how to calculate total shareholder return, to have a better understanding of the concept.
Suppose the investor purchased a stock of XYZ company for $20. The current price of the stock comes out to be $25. Also, till date the investor has received a total dividend of $4.
Calculation of total shareholder return will be –
TSR = (25 – 20 + 4 ) / 20 = 45%
The TSR for the stock comes out to be 45%.
- TSR is a very useful tool for comparing the returns generated by the stock under consideration and stocks of other companies of similar industries.
- Total shareholder return charts help to determine the overall return generated by the stock on the investment done on it. It is a return that is very easy to understand and analyze.
- It helps an investor to understand how well the stock is performing.
- It is to be noted that total shareholder return analysis considers the return generated by the stock in the past. But it does not consider the return that is expected to be achieved on the stock in the coming future.
- TSR is calculated in the case of publicly traded companiesPublicly Traded CompaniesPublicly Traded Companies, also called Publicly Listed Companies, are the Companies which list their shares on the public stock exchange allowing the trading of shares to the common public. It means that anybody can sell or buy these companies’ shares from the open market., not at a divisional or individual level, but on an overall level.
- The cumulative total shareholder return can be calculated only for investments with one or more cash flowsCash FlowsCash Flow is the amount of cash or cash equivalent generated & consumed by a Company over a given period. It proves to be a prerequisite for analyzing the business’s strength, profitability, & scope for betterment. after the stock is purchased.
- It is based on the market price of a stock, which may be affected by many external factors, especially in the short term.
- It does not determine the exact size of the investment or the return generated on the stock. Accordingly, it may be possible that total shareholderShareholderA shareholder is an individual or an institution that owns one or more shares of stock in a public or a private corporation and, therefore, are the legal owners of the company. The ownership percentage depends on the number of shares they hold against the company's total shares. return shows a stock with higher returns to be favorable, though. However, the absolute amount of return in figures may be significantly less.
- The concept of cumulative total shareholder return does not account for the cost of capital, so it is impossible to compare the returns for different periods.
This has been a guide to what is Total Shareholder Return. We explain it with formula, example, advantages and disadvantages. You may learn more about financing from the following articles –