Some have more dollars than sense, they say, so even companies that have no revenue, no profit, and a record of falling short, can easily find investors. But as Peter Lynch said in One Up On Wall Street, 'Long shots almost never pay off.'
In contrast to all that, I prefer to spend time on companies like Prime Financial Group (ASX:PFG), which has not only revenues, but also profits. Even if the shares are fully valued today, most capitalists would recognize its profits as the demonstration of steady value generation. In comparison, loss making companies act like a sponge for capital - but unlike such a sponge they do not always produce something when squeezed.
Prime Financial Group's Improving Profits
In the last three years Prime Financial Group's earnings per share took off like a rocket; fast, and from a low base. So the actual rate of growth doesn't tell us much. As a result, I'll zoom in on growth over the last year, instead. Like a firecracker arcing through the night sky, Prime Financial Group's EPS shot from AU$0.0069 to AU$0.014, over the last year. You don't see 108% year-on-year growth like that, very often.
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. Prime Financial Group's EBIT margins have actually improved by 7.8 percentage points in the last year, to reach 21%, but, on the flip side, revenue was down 2.8%. That falls short of ideal.
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.
Since Prime Financial Group is no giant, with a market capitalization of AU$19m, so you should definitely check its cash and debt before getting too excited about its prospects.
Are Prime Financial Group Insiders Aligned With All Shareholders?
Many consider high insider ownership to be a strong sign of alignment between the leaders of a company and the ordinary shareholders. So we're pleased to report that Prime Financial Group insiders own a meaningful share of the business. In fact, they own 46% of the shares, making insiders a very influential shareholder group. I'm reassured by this kind of alignment, as it suggests the business will be run for the benefit of shareholders. Of course, Prime Financial Group is a very small company, with a market cap of only AU$19m. So despite a large proportional holding, insiders only have AU$8.6m worth of stock. That might not be a huge sum but it should be enough to keep insiders motivated!
Does Prime Financial Group Deserve A Spot On Your Watchlist?
Prime Financial Group's earnings per share growth have been levitating higher, like a mountain goat scaling the Alps. That EPS growth certainly has my attention, and the large insider ownership only serves to further stoke my interest. At times fast EPS growth is a sign the business has reached an inflection point; and I do like those. So yes, on this short analysis I do think it's worth considering Prime Financial Group for a spot on your watchlist. Still, you should learn about the 2 warning signs we've spotted with Prime Financial Group .
Of course, you can do well (sometimes) buying stocks that are not growing earnings and do not have insiders buying shares. But as a growth investor I always like to check out companies that do have those features. You can access a free list of them here.
Please note the insider transactions discussed in this article refer to reportable transactions in the relevant jurisdiction.
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