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 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 Advanced Braking Technology (ASX:ABV). While profit is not necessarily a social good, it's easy to admire a business that can consistently produce it. 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 Advanced Braking Technology Growing Its Earnings Per Share?
In business, though not in life, profits are a key measure of success; and share prices tend to reflect earnings per share (EPS). So like a ray of sunshine through a gap in the clouds, improving EPS is considered a good sign. It is therefore awe-striking that Advanced Braking Technology's EPS went from AU$0.00049 to AU$0.0016 in just one year. When you see earnings grow that quickly, it often means good things ahead for the company. Could this be a sign that the business has reached an inflection point?
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. While we note Advanced Braking Technology's EBIT margins were flat over the last year, revenue grew by a solid 16% to AU$9.7m. 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.
Advanced Braking Technology isn't a huge company, given its market capitalization of AU$14m. That makes it extra important to check on its balance sheet strength.
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. This view is based on the possibility that stock purchases signal bullishness on behalf of the buyer. However, small purchases are not always indicative of conviction, and insiders don't always get it right.
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$1.0m for shares, at about AU$0.037 per share. That certainly pricks my ears up.
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 60% 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$14m. That means insiders only have AU$8.2m worth of shares, despite the large proportional holding. That might not be a huge sum but it should be enough to keep insiders motivated!
Is Advanced Braking Technology Worth Keeping An Eye On?
Advanced Braking Technology's earnings have taken off like any random crypto-currency did, back in 2017. The incing on the cake is that insiders own a large chunk of the company and one has even been buying more shares. This quick rundown suggests that the business may be of good quality, and also at an inflection point, so maybe Advanced Braking Technology deserves timely attention. We should say that we've discovered 2 warning signs for Advanced Braking Technology (1 is a bit concerning!) that you should be aware of before investing here.
As a growth investor I do like to see insider buying. But Advanced Braking Technology isn't the only one. You can see a a free list of them here.
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.