Does TerraCom (ASX:TER) Deserve A Spot On Your Watchlist?

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 the reality is that when a company loses money each year, for long enough, its investors will usually take their share of those losses. A loss-making company is yet to prove itself with profit, and eventually the inflow of external capital may dry up.

In contrast to all that, many investors prefer to focus on companies like TerraCom (ASX:TER), which has not only revenues, but also profits. Now this is not to say that the company presents the best investment opportunity around, but profitability is a key component to success in business.

Check out our latest analysis for TerraCom

How Fast Is TerraCom Growing Its Earnings Per Share?

Investors and investment funds chase profits, and that means share prices tend rise with positive earnings per share (EPS) outcomes. So a growing EPS generally brings attention to a company in the eyes of prospective investors. Commendations have to be given in seeing that TerraCom grew its EPS from AU$0.024 to AU$0.40, in one short year. When you see earnings grow that quickly, it often means good things ahead for the company. But the key is discerning whether something profound has changed, or if this is a just a one-off boost.

Careful consideration of revenue growth and earnings before interest and taxation (EBIT) margins can help inform a view on the sustainability of the recent profit growth. TerraCom shareholders can take confidence from the fact that EBIT margins are up from 18% to 53%, and revenue is growing. That's great to see, on both counts.

The chart below shows how the company's bottom and top lines have progressed over time. Click on the chart to see the exact numbers.

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 TerraCom's balance sheet strength, before getting too excited.

Are TerraCom Insiders Aligned With All Shareholders?

Investors are always searching for a vote of confidence in the companies they hold and insider buying is one of the key indicators for optimism on the market. This view is based on the possibility that stock purchases signal bullishness on behalf of the buyer. However, small purchases are not always indicative of conviction, and insiders don't always get it right.

Even though some insiders sold down their holdings, their actions speak louder than words with AU$815k more invested than sold by people who know they company best. An optimistic sign for those with TerraCom in their watchlist. Zooming in, we can see that the biggest insider purchase was by Non-Executive Director Mark Lochtenberg for AU$480k worth of shares, at about AU$0.80 per share.

Along with the insider buying, another encouraging sign for TerraCom is that insiders, as a group, have a considerable shareholding. As a matter of fact, their holding is valued at AU$26m. That's a lot of money, and no small incentive to work hard. That amounts to 5.4% of the company, demonstrating a degree of high-level alignment with shareholders.

Should You Add TerraCom To Your Watchlist?

TerraCom's earnings have taken off in quite an impressive fashion. What's more, insiders own a significant stake in the company and have been buying more shares. This quick rundown suggests that the business may be of good quality, and also at an inflection point, so maybe TerraCom deserves timely attention. What about risks? Every company has them, and we've spotted 2 warning signs for TerraCom you should know about.

There are plenty of other companies that have insiders buying up shares. So if you like the sound of TerraCom, you'll probably love this free list of growing companies that insiders are buying.

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.