RS Group (LON: RS1) shares give us a timely reminder about how shares are actually valued. Past profits, past performance, are interesting matters to consider. But what really determines prices is the future. In more detail, the theoretical value of a share - indeed any investment instrument - is the net present value of all future income. So, future income, times risk, multiplied by a suitable discount rate to reflect inflation, interest rates and so on. This can lead to substantial price changes on seemingly minor issues, for we're looking years and possibly decades into the future here. This a small change in current estimations of the future can lead to large changes in net present value.
This is what has happened at RS Group. The Q4 trading statement shows that profits are expected to be ahead of expectations. Which is nice, obviously. But here's the trick about reading these sorts of reports. The interesting line is usually the one that's not emphasised. The trick is therefore to work out what they're maybe hoping we won't notice.
RS Group share price from London Stock Exchange
Here that little line is this: “While revenue momentum has slowed in the fourth quarter” and what they mean there is that sales growth is slowing. Something they then confirm a little later: “ Like-for-like revenue growth of 1%,” and “Americas slowed in Q4”. None of this is a disaster, they're not predicting an imminent recession nor do they think they will fall into loss. Things just aren't turning out quite as well as most thought they would.
But such a seemingly minor change making a 4 to 5% difference in the market capitalisation? Sure - because this now affects all estimates of future income from the company and the stock. A useful lesson for us to keep in mind. Seemingly minor changes in current conditions can affect share prices considerably - for share prices are the capitalisation of all future income.