With EPS Growth And More, Energy Action (ASX:EAX) Makes An Interesting Case

Investors are often guided by the idea of discovering 'the next big thing', even if that means buying 'story stocks' without any revenue, let alone profit. But as Peter Lynch said in One Up On Wall Street, 'Long shots almost never pay off.' Loss-making companies are always racing against time to reach financial sustainability, so investors in these companies may be taking on more risk than they should.

If this kind of company isn't your style, you like companies that generate revenue, and even earn profits, then you may well be interested in Energy Action (ASX:EAX). While profit isn't the sole metric that should be considered when investing, it's worth recognising businesses that can consistently produce it.

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How Fast Is Energy Action Growing Its Earnings Per Share?

In the last three years Energy Action's earnings per share took off; so much so that it's a bit disingenuous to use these figures to try and deduce long term estimates. So it would be better to isolate the growth rate over the last year for our analysis. Energy Action's EPS shot up from AU$0.019 to AU$0.028; a result that's bound to keep shareholders happy. That's a fantastic gain of 48%.

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. Energy Action's EBIT margins have actually improved by 4.6 percentage points in the last year, to reach 20%, but, on the flip side, revenue was down 4.7%. While not disastrous, these figures could be better.

The chart below shows how the company's bottom and top lines have progressed over time. To see the actual numbers, click on the chart.

Check out our latest analysis for Energy Action

Energy Action isn't a huge company, given its market capitalisation of AU$13m. That makes it extra important to check on its balance sheet strength.

Are Energy Action Insiders Aligned With All Shareholders?

Insider interest in a company always sparks a bit of intrigue and many investors are on the lookout for companies where insiders are putting their money where their mouth is. That's because insider buying often indicates that those closest to the company have confidence that the share price will perform well. However, small purchases are not always indicative of conviction, and insiders don't always get it right.

We note that Energy Action insiders spent AU$79k on stock, over the last year; in contrast, we didn't see any selling. That paints the company in a nice light, as it signals that its leaders are feeling confident in where the company is heading. Zooming in, we can see that the biggest insider purchase was by CEO & Executive Director Derek Myers for AU$71k worth of shares, at about AU$0.35 per share.

These recent buys aren't the only encouraging sign for shareholders, as a look at the shareholder registry for Energy Action will reveal that insiders own a significant piece of the pie. Indeed, with a collective holding of 57%, company insiders are in control and have plenty of capital behind the venture. This should be seen as a good thing, as it means insiders have a personal interest in delivering the best outcomes for shareholders. Of course, Energy Action is a very small company, with a market cap of only AU$13m. So this large proportion of shares owned by insiders only amounts to AU$7.6m. That's not a huge stake in absolute terms, but it should help keep insiders aligned with other shareholders.

While insiders are apparently happy to hold and accumulate shares, that is just part of the big picture. That's because Energy Action's CEO, Derek Myers, is paid at a relatively modest level when compared to other CEOs for companies of this size. For companies with market capitalisations under AU$307m, like Energy Action, the median CEO pay is around AU$445k.

The Energy Action CEO received total compensation of just AU$121k in the year to June 2024. That looks like a modest pay packet, and may hint at a certain respect for the interests of shareholders. 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 a culture of integrity, in a broader sense.

Does Energy Action Deserve A Spot On Your Watchlist?

For growth investors, Energy Action's raw rate of earnings growth is a beacon in the night. Not only that, but we can see that insiders both own a lot of, and are buying more shares in the company. Astute investors will want to keep this stock on watch. You still need to take note of risks, for example - Energy Action has 4 warning signs (and 2 which don't sit too well with us) we think you should know about.

The good news is that Energy Action is not the only stock with insider buying. Here's a list of small cap, undervalued companies in AU with insider buying in the last three months!

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.