Here's Why We Think TerraCom (ASX:TER) Is Well Worth Watching

The excitement of investing in a company that can reverse its fortunes is a big draw for some speculators, so even companies that have no revenue, no profit, and a record of falling short, can manage to find investors. Unfortunately, these high risk investments often have little probability of ever paying off, and many investors pay a price to learn their lesson. Loss making companies can act like a sponge for capital - so investors should be cautious that they're not throwing good money after bad.

Despite being in the age of tech-stock blue-sky investing, many investors still adopt a more traditional strategy; buying shares in profitable companies like TerraCom (ASX:TER). While profit isn't the sole metric that should be considered when investing, it's worth recognising businesses that can consistently produce it.

See our latest analysis for TerraCom

TerraCom's Improving Profits

In the last three years TerraCom's earnings per share took off; so much so that it's a bit disingenuous to use these figures to try and deduce long term estimates. Thus, it makes sense to focus on more recent growth rates, instead. TerraCom's EPS shot up from AU$0.26 to AU$0.33; a result that's bound to keep shareholders happy. That's a commendable gain of 26%.

Top-line growth is a great indicator that growth is sustainable, and combined with a high earnings before interest and taxation (EBIT) margin, it's a great way for a company to maintain a competitive advantage in the market. TerraCom's EBIT margins have actually improved by 4.6 percentage points in the last year, to reach 48%, but, on the flip side, revenue was down 18%. That falls short of ideal.

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.

TerraCom isn't a huge company, given its market capitalisation of AU$344m. That makes it extra important to check on its balance sheet strength.

Are TerraCom Insiders Aligned With All Shareholders?

It's said that there's no smoke without fire. For investors, insider buying is often the smoke that indicates which stocks could set the market alight. Because often, the purchase of stock is a sign that the buyer views it as undervalued. However, insiders are sometimes wrong, and we don't know the exact thinking behind their acquisitions.

Not only did TerraCom insiders refrain from selling stock during the year, but they also spent AU$262k buying it. That's nice to see, because it suggests insiders are optimistic. Zooming in, we can see that the biggest insider purchase was by Non-Executive Director Glen Lewis for AU$103k worth of shares, at about AU$1.03 per share.

Does TerraCom Deserve A Spot On Your Watchlist?

If you believe that share price follows earnings per share you should definitely be delving further into TerraCom's strong EPS growth. The growth rate should be enticing enough to consider researching the company, and the insider buying is a great added bonus. In essence, your time will not be wasted checking out TerraCom in more detail. Before you take the next step you should know about the 2 warning signs for TerraCom (1 is a bit unpleasant!) that we have uncovered.

Keen growth investors love to see insider buying. Thankfully, TerraCom isn't the only one. You can see a 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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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.