Here's Why We Think Advanced Braking Technology (ASX:ABV) Is Well Worth Watching

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.

If, on the other hand, you like companies that have revenue, and even earn profits, then you may well be interested in Advanced Braking Technology (ASX:ABV). While that doesn't make the shares worth buying at any price, you can't deny that successful capitalism requires profit, eventually. In comparison, loss making companies act like a sponge for capital - but unlike such a sponge they do not always produce something when squeezed.

See our latest analysis for Advanced Braking Technology

Advanced Braking Technology's Improving Profits

In the last three years Advanced Braking Technology's earnings per share took off like a rocket; fast, and from a low base. So the actual rate of growth doesn't tell us much. Thus, it makes sense to focus on more recent growth rates, instead. Like a wedge-tailed eagle on the wind, Advanced Braking Technology's EPS soared from AU$0.0011 to AU$0.0014, in just one year. That's a commendable gain of 26%.

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. While we note Advanced Braking Technology's EBIT margins were flat over the last year, revenue grew by a solid 17% to AU$10m. That's progress.

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.

Since Advanced Braking Technology is no giant, with a market capitalization of AU$13m, so you should definitely check its cash and debt before getting too excited about its prospects.

Are Advanced Braking Technology Insiders Aligned With All Shareholders?

Like that fresh smell in the air when the rains are coming, insider buying fills me with optimistic anticipation. Because oftentimes, the purchase of stock is a sign that the buyer views it as undervalued. However, insiders are sometimes wrong, and we don't know the exact thinking behind their acquisitions.

While we did see insider selling of Advanced Braking Technology stock in the last year, one single insider spent plenty more buying. To wit, Keith Knowles outlaid AU$931k for shares, at about AU$0.035 per share. To me, that's probably a sign of conviction.

On top of the insider buying, we can also see that Advanced Braking Technology insiders own a large chunk of the company. In fact, they own 62% of the company, so they will share in the same delights and challenges experienced by the ordinary shareholders. This makes me think they will be incentivised to plan for the long term - something I like to see. Of course, Advanced Braking Technology is a very small company, with a market cap of only AU$13m. That means insiders only have AU$8.1m worth of shares, despite the large proportional holding. That's not a huge stake in absolute terms, but it should help keep insiders aligned with other shareholders.

Should You Add Advanced Braking Technology To Your Watchlist?

You can't deny that Advanced Braking Technology has grown its earnings per share at a very impressive rate. That's attractive. Better still, insiders own a large chunk of the company and one has even been buying more shares. So I do think this is one stock worth watching. However, before you get too excited we've discovered 2 warning signs for Advanced Braking Technology (1 shouldn't be ignored!) that you should be aware of.

There are plenty of other companies that have insiders buying up shares. So if you like the sound of Advanced Braking Technology, you'll probably love this free list of growing companies that insiders are buying.

Please note the insider transactions discussed in this article refer to reportable transactions in the relevant jurisdiction.

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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.