Stock Analysis

Here's Why I Think Australian Ethical Investment (ASX:AEF) Might Deserve Your Attention Today

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ASX:AEF
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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. But the reality is that when a company loses money each year, for long enough, its investors will usually take their share of those losses.

In the age of tech-stock blue-sky investing, my choice may seem old fashioned; I still prefer profitable companies like Australian Ethical Investment (ASX:AEF). 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.

See our latest analysis for Australian Ethical Investment

How Quickly Is Australian Ethical Investment Increasing Earnings Per Share?

If you believe that markets are even vaguely efficient, then over the long term you'd expect a company's share price to follow its earnings per share (EPS). Therefore, there are plenty of investors who like to buy shares in companies that are growing EPS. As a tree reaches steadily for the sky, Australian Ethical Investment's EPS has grown 29% each year, compound, over three years. So it's not surprising to see the company trades on a very high multiple of (past) earnings.

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. The good news is that Australian Ethical Investment is growing revenues, and EBIT margins improved by 2.3 percentage points to 29%, over the last year. Ticking those two boxes is a good sign of growth, in my book.

You can take a look at the company's revenue and earnings growth trend, in the chart below. To see the actual numbers, click on the chart.

earnings-and-revenue-history
ASX:AEF Earnings and Revenue History February 26th 2021

While it's always good to see growing profits, you should always remember that a weak balance sheet could come back to bite. So check Australian Ethical Investment's balance sheet strength, before getting too excited.

Are Australian Ethical Investment Insiders Aligned With All Shareholders?

I like company leaders to have some skin in the game, so to speak, because it increases alignment of incentives between the people running the business, and its true owners. So it is good to see that Australian Ethical Investment insiders have a significant amount of capital invested in the stock. Indeed, they have a glittering mountain of wealth invested in it, currently valued at AU$182m. Coming in at 25% of the business, that holding gives insiders a lot of influence, and plenty of reason to generate value for shareholders. Very encouraging.

It means a lot to see insiders invested in the business, but I find myself wondering if remuneration policies are shareholder friendly. A brief analysis of the CEO compensation suggests they are. For companies with market capitalizations between AU$252m and AU$1.0b, like Australian Ethical Investment, the median CEO pay is around AU$869k.

The Australian Ethical Investment CEO received AU$482k in compensation for the year ending . That seems pretty reasonable, especially given its below the median for similar sized companies. CEO compensation is hardly the most important aspect of a company to consider, but when its reasonable that does give me a little more confidence that leadership are looking out for shareholder interests. It can also be a sign of a culture of integrity, in a broader sense.

Should You Add Australian Ethical Investment To Your Watchlist?

For growth investors like me, Australian Ethical Investment's raw rate of earnings growth is a beacon in the night. If that's not enough, consider also that the CEO pay is quite reasonable, and insiders are well-invested alongside other shareholders. This may only be a fast rundown, but the takeaway for me is that Australian Ethical Investment is worth keeping an eye on. However, before you get too excited we've discovered 1 warning sign for Australian Ethical Investment that you should be aware of.

Although Australian Ethical Investment certainly looks good to me, I would like it more if insiders were buying up shares. If you like to see insider buying, too, 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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