Here's Why We Think Commonwealth Bank of Australia (ASX:CBA) Is Well Worth Watching

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 currently lacks a track record of revenue and profit. Sometimes these stories can cloud the minds of investors, leading them to invest with their emotions rather than on the merit of good company fundamentals. While a well funded company may sustain losses for years, it will need to generate a profit eventually, or else investors will move on and the company will wither away.

Despite being in the age of tech-stock blue-sky investing, many investors still adopt a more traditional strategy; buying shares in profitable companies like Commonwealth Bank of Australia (ASX:CBA). Now this is not to say that the company presents the best investment opportunity around, but profitability is a key component to success in business.

Our analysis indicates that CBA is potentially overvalued!

Commonwealth Bank of Australia's Earnings Per Share Are Growing

Generally, companies experiencing growth in earnings per share (EPS) should see similar trends in share price. That makes EPS growth an attractive quality for any company. We can see that in the last three years Commonwealth Bank of Australia grew its EPS by 7.9% per year. That might not be particularly high growth, but it does show that per-share earnings are moving steadily in the right direction.

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. It's noted that Commonwealth Bank of Australia's revenue from operations was lower than its revenue in the last twelve months, so that could distort our analysis of its margins. Commonwealth Bank of Australia maintained stable EBIT margins over the last year, all while growing revenue 6.1% to AU$25b. That's a real positive.

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.

In investing, as in life, the future matters more than the past. So why not check out this free interactive visualization of Commonwealth Bank of Australia's forecast profits?

Are Commonwealth Bank of Australia Insiders Aligned With All Shareholders?

Since Commonwealth Bank of Australia has a market capitalisation of AU$174b, we wouldn't expect insiders to hold a large percentage of shares. But we do take comfort from the fact that they are investors in the company. We note that their impressive stake in the company is worth AU$298m. We note that this amounts to 0.2% of the company, which may be small owing to the sheer size of Commonwealth Bank of Australia but it's still worth mentioning. This still shows shareholders there is a degree of alignment between management and themselves.

Is Commonwealth Bank of Australia Worth Keeping An Eye On?

As previously touched on, Commonwealth Bank of Australia is a growing business, which is encouraging. For those who are looking for a little more than this, the high level of insider ownership enhances our enthusiasm for this growth. The combination definitely favoured by investors so consider keeping the company on a watchlist. Before you take the next step you should know about the 3 warning signs for Commonwealth Bank of Australia (1 is significant!) that we have uncovered.

Although Commonwealth Bank of Australia certainly looks good, it may appeal to more investors if insiders were buying up shares. If you like to see insider buying, 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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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.