I Ran A Stock Scan For Earnings Growth And MCS Services (ASX:MSG) Passed With Ease

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.

In contrast to all that, I prefer to spend time on companies like MCS Services (ASX:MSG), which has not only revenues, but also profits. 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.

View our latest analysis for MCS Services

MCS Services's Improving Profits

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. You can imagine, then, that it almost knocked my socks off when I realized that MCS Services grew its EPS from AU$0.0017 to AU$0.0083, in one short year. Even though that growth rate is unlikely to be repeated, that looks like a breakout improvement. But the key is discerning whether something profound has changed, or if this is a just a one-off boost.

I like to see top-line growth as an indication that growth is sustainable, and I look for a high earnings before interest and taxation (EBIT) margin to point to a competitive moat (though some companies with low margins also have moats). The good news is that MCS Services is growing revenues, and EBIT margins improved by 4.4 percentage points to 5.2%, over the last year. Ticking those two boxes is a good sign of growth, in my book.

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.

Since MCS Services is no giant, with a market capitalization of AU$12m, so you should definitely check its cash and debt before getting too excited about its prospects.

Are MCS Services 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. Of course, we can never be sure what insiders are thinking, we can only judge their actions.

While we did see insider selling of MCS Services stock in the last year, one single insider spent plenty more buying. To wit, Richard Batrachenko outlaid AU$365k for shares, at about AU$0.03 per share. To me, that's probably a sign of conviction.

On top of the insider buying, we can also see that MCS Services insiders own a large chunk of the company. Actually, with 48% of the company to their names, insiders are profoundly invested in the business. I'm always comforted by solid insider ownership like this, as it implies that those running the business are genuinely motivated to create shareholder value. Of course, MCS Services is a very small company, with a market cap of only AU$12m. So despite a large proportional holding, insiders only have AU$5.6m worth of stock. 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 pretty picture. The cherry on top is that the CEO, Paul Simmons is paid comparatively modestly to CEOs at similar sized companies. For companies with market capitalizations under AU$281m, like MCS Services, the median CEO pay is around AU$400k.

MCS Services offered total compensation worth AU$253k to its CEO in the year to . That seems pretty reasonable, especially given its below the median for similar sized companies. While the level of CEO compensation isn't a huge factor in my view of the company, modest remuneration is a positive, because it suggests that the board keeps shareholder interests in mind. It can also be a sign of a culture of integrity, in a broader sense.

Is MCS Services Worth Keeping An Eye On?

MCS Services's earnings per share have taken off like a rocket aimed right at the moon. 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 MCS Services deserves timely attention. Before you take the next step you should know about the 1 warning sign for MCS Services that we have uncovered.

The good news is that MCS Services is not the only growth stock with insider buying. Here's a list of them... 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.