For beginners, it can seem like a good idea (and an exciting prospect) to buy a company that tells a good story to investors, even if it completely lacks a track record of revenue and profit. 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.
So if you’re like me, you might be more interested in profitable, growing companies, like Faes Farma (BME:FAE). While that doesn’t make the shares worth buying at any price, you can’t deny that successful capitalism requires profit, eventually. While a well funded company may sustain losses for years, unless its owners have an endless appetite for subsidizing the customer, it will need to generate a profit eventually, or else breathe its last breath.
How Fast Is Faes Farma 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). That means EPS growth is considered a real positive by most successful long-term investors. Impressively, Faes Farma has grown EPS by 19% per year, compound, in the last three years. If the company can sustain that sort of growth, we’d expect shareholders to come away winners.
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 Faes Farma’s revenue from operations was lower than its revenue in the last twelve months, so that could distort my analysis of its margins. Faes Farma shareholders can take confidence from the fact that EBIT margins are up from 18% to 20%, and revenue is growing. Ticking those two boxes is a good sign of growth, in my book.
In the chart below, you can see how the company has grown earnings, and revenue, over time. For finer detail, click on the image.
Fortunately, we’ve got access to analyst forecasts of Faes Farma’s future profits. You can do your own forecasts without looking, or you can take a peek at what the professionals are predicting.
Are Faes Farma Insiders Aligned With All Shareholders?
It makes me feel more secure owning shares in a company if insiders also own shares, thusly more closely aligning our interests. So it is good to see that Faes Farma insiders have a significant amount of capital invested in the stock. To be specific, they have €34m worth of shares. That’s a lot of money, and no small incentive to work hard. Despite being just 2.5% of the company, the value of that investment is enough to show insiders have plenty riding on the venture.
Does Faes Farma Deserve A Spot On Your Watchlist?
You can’t deny that Faes Farma has grown its earnings per share at a very impressive rate. That’s attractive. I think that EPS growth is something to boast of, and it doesn’t surprise me that insiders are holding on to a considerable chunk of shares. Fast growth and confident insiders should be enough to warrant further research. So the answer is that I do think this is a good stock to follow along with. Once you’ve identified a business you like, the next step is to consider what you think it’s worth. And right now is your chance to view our exclusive discounted cashflow valuation of Faes Farma. You might benefit from giving it a glance today.
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 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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