It’s only natural that many investors, especially those who are new to the game, prefer to buy shares in ‘sexy’ stocks with a good story, even if those businesses lose money. But the reality is that when a company loses money each year, for long enough, its investors will usually take their share of those losses.
In the age of tech-stock blue-sky investing, my choice may seem old fashioned; I still prefer profitable companies like Ausom Enterprise (NSE:AUSOMENT). Even if the shares are fully valued today, most capitalists would recognize its profits as the demonstration of steady value generation. Loss-making companies are always racing against time to reach financial sustainability, but time is often a friend of the profitable company, especially if it is growing.
How Fast Is Ausom Enterprise Growing Its Earnings Per Share?
In the last three years Ausom Enterprise’s earnings per share took off like a rocket; fast, and from a low base. So the actual rate of growth doesn’t tell us much. Thus, it makes sense to focus on more recent growth rates, instead. Over twelve months, Ausom Enterprise increased its EPS from ₹11.35 to ₹12.35. That amounts to a small improvement of 8.8%.
I like to take a look at earnings before interest and (EBIT) tax margins, as well as revenue growth, to get another take on the quality of the company’s growth. Not all of Ausom Enterprise’s revenue this year is revenue from operations, so keep in mind the revenue and margin numbers I’ve used might not be the best representation of the underlying business. While Ausom Enterprise did well to grow revenue over the last year, EBIT margins were dampened at the same time. So if EBIT margins can stabilize, this top-line growth should pay off for shareholders.
The chart below shows how the company’s bottom and top lines have progressed over time.
Ausom Enterprise isn’t a huge company, given its market capitalization of ₹538m. That makes it extra important to check on its balance sheet strength.
Are Ausom Enterprise Insiders Aligned With All Shareholders?
Personally, I like to see high insider ownership of a company, since it suggests that it will be managed in the interests of shareholders. So as you can imagine, the fact that Ausom Enterprise insiders own a significant number of shares certainly appeals to me. In fact, they own 81% of the company, so they will share in the same delights and challenges experienced by the ordinary shareholders. This makes me think they will be incentivised to plan for the long term – something I like to see. Of course, Ausom Enterprise is a very small company, with a market cap of only ₹538m. That means insiders only have ₹437m worth of shares, despite the large proportional holding. That’s not a huge stake in absolute terms, but it should help keep insiders aligned with other shareholders.
It means a lot to see insiders invested in the business, but I find myself wondering if remuneration policies are shareholder friendly. A brief analysis of the CEO compensation suggests they are. For companies with market capitalizations under ₹14b, like Ausom Enterprise, the median CEO pay is around ₹2.4m.
The CEO of Ausom Enterprise was paid just ₹4k in total compensation for the year ending March 2019. You could consider this pay as somewhat symbolic, which suggests the CEO does not need a lot of compensation to stay motivated. CEO remuneration levels are not the most important metric for investors, but when the pay is modest, that does support enhanced alignment between the CEO and the ordinary shareholders. It can also be a sign of a culture of integrity, in a broader sense.
Is Ausom Enterprise Worth Keeping An Eye On?
One important encouraging feature of Ausom Enterprise is that it is growing profits. The fact that EPS is growing is a genuine positive for Ausom Enterprise, but the pretty picture gets better than that. With a meaningful level of insider ownership, and reasonable CEO pay, a reasonable mind might conclude that this is one stock worth watching. Another important measure of business quality not discussed here, is return on equity (ROE). Click on this link to see how Ausom Enterprise shapes up to industry peers, when it comes to ROE.
Of course, you can do well (sometimes) buying stocks that are not growing earnings and do not have insiders buying shares. But as a growth investor I always like to check out companies that do have those features. You can access a free list of them here.
Please note the insider transactions discussed in this article refer to reportable transactions in the relevant jurisdiction
If you spot an error that warrants correction, please contact the editor at email@example.com. 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. Simply Wall St has no position in the stocks mentioned.
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