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 Peter Lynch said in One Up On Wall Street, ‘Long shots almost never pay off.’
In the age of tech-stock blue-sky investing, my choice may seem old fashioned; I still prefer profitable companies like TransAlta Renewables (TSE:RNW). While that doesn’t make the shares worth buying at any price, you can’t deny that successful capitalism requires profit, eventually. Loss-making companies are always racing against time to reach financial sustainability, but time is often a friend of the profitable company, especially if it is growing.
Check out our latest analysis for TransAlta Renewables
TransAlta Renewables’s Earnings Per Share Are Growing.
As one of my mentors once told me, share price follows earnings per share (EPS). That makes EPS growth an attractive quality for any company. As a tree reaches steadily for the sky, TransAlta Renewables’s EPS has grown 32% each year, compound, over three years. If the company can sustain that sort of growth, we’d expect shareholders to come away winners.
I like to take a look at earnings before interest and (EBIT) tax margins, as well as revenue growth, to get another take on the quality of the company’s growth. TransAlta Renewables maintained stable EBIT margins over the last year, all while growing revenue 4.3% to CA$457m. That’s progress.
The chart below shows how the company’s bottom and top lines have progressed over time.
In investing, as in life, the future matters more than the past. So why not check out this free interactive visualization of TransAlta Renewables’s forecast profits?
Are TransAlta Renewables Insiders Aligned With All Shareholders?
As a general rule, I think it worth considering how much the CEO is paid, since unreasonably high rates could be considered against the interests of shareholders. I discovered that the median total compensation for the CEOs of companies like TransAlta Renewables with market caps between CA$2.6b and CA$8.5b is about CA$3.8m.
The CEO of TransAlta Renewables only received CA$675k in total compensation for the year ending December 2018. That’s clearly well below average, so at a glance, that arrangement seems generous to shareholders, and points to a modest remuneration culture. CEO remuneration levels are not the most important metric for investors, but when the pay is modest, that does support enhanced alignment between the CEO and the ordinary shareholders. It can also be a sign of good governance, more generally.
Does TransAlta Renewables Deserve A Spot On Your Watchlist?
For growth investors like me, TransAlta Renewables’s raw rate of earnings growth is a beacon in the night. 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. Of course, just because TransAlta Renewables is growing does not mean it is undervalued. If you’re wondering about the valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Although TransAlta Renewables 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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