Stock Analysis

Should You Be Adding Australian Ethical Investment (ASX:AEF) To Your Watchlist 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.

So if you're like me, you might be more interested in profitable, growing companies, like Australian Ethical Investment (ASX:AEF). Now, I'm not saying that the stock is necessarily undervalued today; but I can't shake an appreciation for the profitability of the business itself. 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.

Check out our latest analysis for Australian Ethical Investment

How Fast Is Australian Ethical Investment Growing?

The market is a voting machine in the short term, but a weighing machine in the long term, so share price follows earnings per share (EPS) eventually. That makes EPS growth an attractive quality for any company. It certainly is nice to see that Australian Ethical Investment has managed to grow EPS by 28% per year over three years. This has no doubt fuelled the optimism that sees the stock trading on a high multiple of earnings.

I like to take a look at earnings before interest and (EBIT) tax margins, as well as revenue growth, to get another take on the quality of the company's growth. Australian Ethical Investment maintained stable EBIT margins over the last year, all while growing revenue 18% to AU$59m. That's progress.

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 December 30th 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. Notably, they have an enormous stake in the company, worth AU$375m. Coming in at 25% of the business, that holding gives insiders a lot of influence, and plenty of reason to generate value for shareholders. So it might be my imagination, but I do sense the glimmer of an opportunity.

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. I discovered that the median total compensation for the CEOs of companies like Australian Ethical Investment with market caps between AU$552m and AU$2.2b is about AU$1.3m.

The Australian Ethical Investment CEO received AU$749k in compensation for the year ending . That seems pretty reasonable, especially given its below the median for similar sized companies. 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 good governance, more generally.

Is Australian Ethical Investment Worth Keeping An Eye On?

Given my belief that share price follows earnings per share you can easily imagine how I feel about Australian Ethical Investment's strong EPS growth. If that's not enough, consider also that the CEO pay is quite reasonable, and insiders are well-invested alongside other shareholders. Each to their own, but I think all this makes Australian Ethical Investment look rather interesting indeed. Of course, profit growth is one thing but it's even better if Australian Ethical Investment is receiving high returns on equity, since that should imply it can keep growing without much need for capital. Click on this link to see how it is faring against the average in its industry.

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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