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 contrast to all that, I prefer to spend time on companies like Pro Medicus (ASX:PME), which has not only revenues, but also profits. Now, I'm not saying that the stock is necessarily undervalued today; but I can't shake an appreciation for the profitability of the business itself. In comparison, loss making companies act like a sponge for capital - but unlike such a sponge they do not always produce something when squeezed.
How Fast Is Pro Medicus Growing?
If you believe that markets are even vaguely efficient, then over the long term you'd expect a company's share price to follow its earnings per share (EPS). It's no surprise, then, that I like to invest in companies with EPS growth. Who among us would not applaud Pro Medicus's stratospheric annual EPS growth of 45%, compound, over the last three years? That sort of growth never lasts long, but like a shooting star it is well worth watching when it happens.
Careful consideration of revenue growth and earnings before interest and taxation (EBIT) margins can help inform a view on the sustainability of the recent profit growth. Pro Medicus shareholders can take confidence from the fact that EBIT margins are up from 53% to 62%, and revenue is growing. That's great to see, on both counts.
In the chart below, you can see how the company has grown earnings, and revenue, over time. Click on the chart to see the exact numbers.
While we live in the present moment at all times, there's no doubt in my mind that the future matters more than the past. So why not check this interactive chart depicting future EPS estimates, for Pro Medicus?
Are Pro Medicus 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 Pro Medicus insiders own a significant number of shares certainly appeals to me. In fact, they own 56% of the company, so they will share in the same delights and challenges experienced by the ordinary shareholders. To me this is a good sign because it suggests they will be incentivised to build value for shareholders over the long term. And their holding is extremely valuable at the current share price, totalling AU$3.4b. Now that's what I call some serious skin in the game!
It's good to see that insiders are invested in the company, but are remuneration levels reasonable? Well, based on the CEO pay, I'd say they are indeed. For companies with market capitalizations between AU$2.8b and AU$8.8b, like Pro Medicus, the median CEO pay is around AU$2.4m.
The Pro Medicus CEO received total compensation of just AU$508k in the year to . That looks like modest pay to me, and may hint at a certain respect for the interests of shareholders. While the level of CEO compensation isn't a huge factor in my view of the company, modest remuneration is a positive, because it suggests that the board keeps shareholder interests in mind. It can also be a sign of a culture of integrity, in a broader sense.
Should You Add Pro Medicus To Your Watchlist?
Pro Medicus's earnings per share growth have been levitating higher, like a mountain goat scaling the Alps. The sweetener is that insiders have a mountain of stock, and the CEO remuneration is quite reasonable. The sharp increase in earnings could signal good business momentum. Big growth can make big winners, so I do think Pro Medicus is worth considering carefully. Of course, profit growth is one thing but it's even better if Pro Medicus is receiving high returns on equity, since that should imply it can keep growing without much need for capital. Click on this link to see how it is faring against the average in its industry.
Although Pro Medicus certainly looks good to me, I would like it more if insiders were buying up shares. If you like to see insider buying, too, then this free list of growing companies that insiders are buying, could be exactly what you're looking for.
Please note the insider transactions discussed in this article refer to reportable transactions in the relevant jurisdiction.
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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