Investors are often guided by the idea of discovering 'the next big thing', even if that means buying 'story stocks' without any revenue, let alone profit. But as Peter Lynch said in One Up On Wall Street, 'Long shots almost never pay off.' Loss-making companies are always racing against time to reach financial sustainability, so investors in these companies may be taking on more risk than they should.
In contrast to all that, many investors prefer to focus on companies like XRF Scientific (ASX:XRF), which has not only revenues, but also profits. While this doesn't necessarily speak to whether it's undervalued, the profitability of the business is enough to warrant some appreciation - especially if its growing.
XRF Scientific's Earnings Per Share Are Growing
If a company can keep growing earnings per share (EPS) long enough, its share price should eventually follow. That makes EPS growth an attractive quality for any company. Recognition must be given to the that XRF Scientific has grown EPS by 41% per year, over the last three years. While that sort of growth rate isn't sustainable for long, it certainly catches the eye of prospective investors.
It's often helpful to take a look at earnings before interest and tax (EBIT) margins, as well as revenue growth, to get another take on the quality of the company's growth. EBIT margins for XRF Scientific remained fairly unchanged over the last year, however the company should be pleased to report its revenue growth for the period of 28% to AU$40m. That's progress.
The chart below shows how the company's bottom and top lines have progressed over time. To see the actual numbers, click on the chart.
Since XRF Scientific is no giant, with a market capitalisation of AU$109m, you should definitely check its cash and debt before getting too excited about its prospects.
Are XRF Scientific Insiders Aligned With All Shareholders?
It's said that there's no smoke without fire. For investors, insider buying is often the smoke that indicates which stocks could set the market alight. That's because insider buying often indicates that those closest to the company have confidence that the share price will perform well. However, insiders are sometimes wrong, and we don't know the exact thinking behind their acquisitions.
Despite some XRF Scientific insiders disposing of some shares, we note that there was AU$83k more in buying interest among those who know the company best Shareholders who may have questioned insiders selling will find some reassurance in this fact. Zooming in, we can see that the biggest insider purchase was by Non-Executive Director David Brown for AU$33k worth of shares, at about AU$0.65 per share.
Along with the insider buying, another encouraging sign for XRF Scientific is that insiders, as a group, have a considerable shareholding. As a matter of fact, their holding is valued at AU$26m. That shows significant buy-in, and may indicate conviction in the business strategy. As a percentage, this totals to 24% of the shares on issue for the business, an appreciable amount considering the market cap.
Does XRF Scientific Deserve A Spot On Your Watchlist?
XRF Scientific's earnings have taken off in quite an impressive fashion. Just as heartening; insiders both own and are buying more stock. These factors seem to indicate the company's potential and that it has reached an inflection point. We'd suggest XRF Scientific belongs near the top of your watchlist. Even so, be aware that XRF Scientific is showing 2 warning signs in our investment analysis , you should know about...
There are plenty of other companies that have insiders buying up shares. So if you like the sound of XRF Scientific, you'll probably love this free list of growing companies that insiders are buying.
Please note the insider transactions discussed in this article refer to reportable transactions in the relevant jurisdiction.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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