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Like a puppy chasing its tail, some new investors often chase ‘the next big thing’, even if that means buying ‘story stocks’ without revenue, let alone profit. But as Warren Buffett has mused, ‘If you’ve been playing poker for half an hour and you still don’t know who the patsy is, you’re the patsy.’ When they buy such story stocks, investors are all too often the patsy.
If, on the other hand, you like companies that have revenue, and even earn profits, then you may well be interested in Bank of China (HKG:3988). Even if the shares are fully valued today, most capitalists would recognize its profits as the demonstration of steady value generation. In comparison, loss making companies act like a sponge for capital – but unlike such a sponge they do not always produce something when squeezed.
Bank of China’s Improving Profits
Even with very modest growth rates, a company will usually do well if it improves earnings per share (EPS) year after year. So it’s no surprise that some investors are more inclined to invest in profitable businesses. Bank of China has grown its trailing twelve month EPS from CN¥0.57 to CN¥0.60, in the last year. That’s a modest gain of 4.5%.
One way to double-check a company’s growth is to look at how its revenue, and earnings before interest and tax (EBIT) margins are changing. I note that Bank of China’s revenue from operations was lower than its revenue in the last twelve months, so that could distort my analysis of its margins. Bank of China maintained stable EBIT margins over the last year, all while growing revenue 2.1% to CN¥407b. That’s progress.
In the chart below, you can see how the company has grown earnings, and revenue, over time. To see the actual numbers, click on the chart.
Fortunately, we’ve got access to analyst forecasts of Bank of China’s future profits. You can do your own forecasts without looking, or you can take a peek at what the professionals are predicting.
Are Bank of China 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. I discovered that the median total compensation for the CEOs of companies like Bank of China, with market caps over CN¥55b, is about CN¥4.9m.
The Bank of China CEO received total compensation of only CN¥232k in the year to December 2018. This could be considered a token amount, and indicates that the company does not need to use payment to motivate the CEO – that is often a good sign. 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. I’d also argue reasonable pay levels attest to good decision making more generally.
Does Bank of China Deserve A Spot On Your Watchlist?
As I already mentioned, Bank of China is a growing business, which is what I like to see. Not only that, but the CEO is paid quite reasonably, which makes me feel more trusting of the board of directors. So all in all I think it’s worth at least considering for your watchlist. Of course, profit growth is one thing but it’s even better if Bank of China 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 Bank of China 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
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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. Thank you for reading.