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. And in their study titled Who Falls Prey to the Wolf of Wall Street?’ Leuz et. al. found that it is ‘quite common’ for investors to lose money by buying into ‘pump and dump’ schemes.
In the age of tech-stock blue-sky investing, my choice may seem old fashioned; I still prefer profitable companies like Central Depository Services (India) (NSE:CDSL). While that doesn’t make the shares worth buying at any price, you can’t deny that successful capitalism requires profit, eventually. Conversely, a loss-making company is yet to prove itself with profit, and eventually the sweet milk of external capital may run sour.
How Quickly Is Central Depository Services (India) Increasing Earnings Per Share?
The market is a voting machine in the short term, but a weighing machine in the long term, so share price follows earnings per share (EPS) eventually. That means EPS growth is considered a real positive by most successful long-term investors. It certainly is nice to see that Central Depository Services (India) has managed to grow EPS by 20% per year over three years. If the company can sustain that sort of growth, we’d expect shareholders to come away winners.
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. Not all of Central Depository Services (India)’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. On the one hand, Central Depository Services (India)’s EBIT margins fell over the last year, but on the other hand, revenue grew. So if EBIT margins can stabilize, this top-line growth should pay off for shareholders.
In the chart below, you can see how the company has grown earnings, and revenue, over time. For finer detail, click on the image.
In investing, as in life, the future matters more than the past. So why not check out this free interactive visualization of Central Depository Services (India)’s forecast profits?
Are Central Depository Services (India) Insiders Aligned With All Shareholders?
I always like to check up on CEO compensation, because I think that reasonable pay levels, around or below the median, can be a sign that shareholder interests are well considered. For companies with market capitalizations between ₹14b and ₹57b, like Central Depository Services (India), the median CEO pay is around ₹29m.
The Central Depository Services (India) CEO received total compensation of only ₹275k in the year to March 2019. You could consider this pay as somewhat symbolic, which suggests the CEO does not need a lot of compensation to stay motivated. 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 Central Depository Services (India) To Your Watchlist?
Given my belief that share price follows earnings per share you can easily imagine how I feel about Central Depository Services (India)’s strong EPS growth. The fast growth bodes well while the very reasonable CEO pay assists builds some confidence in the board. So I’d venture it may well deserve a spot on your watchlist, or even a little further research. Now, you could try to make up your mind on Central Depository Services (India) by focusing on just these factors, or you could also consider how its price-to-earnings ratio compares to other companies in its industry.
You can invest in any company you want. But if you prefer to focus on stocks that have demonstrated insider buying, here is a list of companies with insider buying in the last three months.
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 firstname.lastname@example.org. 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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