Is Now The Time To Put TerraCom (ASX:TER) On Your Watchlist?

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. Sometimes these stories can cloud the minds of investors, leading them to invest with their emotions rather than on the merit of good company fundamentals. Loss-making companies are always racing against time to reach financial sustainability, so investors in these companies may be taking on more risk than they should.

So if this idea of high risk and high reward doesn't suit, you might be more interested in profitable, growing companies, like TerraCom (ASX:TER). 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.

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. As a result, we'll zoom in on growth over the last year, instead. TerraCom's EPS skyrocketed from AU$0.26 to AU$0.33, in just one year; a result that's bound to bring a smile to shareholders. That's a impressive gain of 26%.

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'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%. While not disastrous, these figures could be better.

The chart below shows how the company's bottom and top lines have progressed over time. For finer detail, click on the image.

TerraCom isn't a huge company, given its market capitalisation of AU$292m. That makes it extra important to check on its balance sheet strength.

Are TerraCom Insiders Aligned With All Shareholders?

It's pleasing to see company leaders with putting their money on the line, 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 TerraCom insiders have a significant amount of capital invested in the stock. To be specific, they have AU$21m worth of shares. That's a lot of money, and no small incentive to work hard. Those holdings account for over 7.0% of the company; visible skin in the game.

Is TerraCom Worth Keeping An Eye On?

If you believe that share price follows earnings per share you should definitely be delving further into TerraCom's strong EPS growth. Further, the high level of insider ownership is impressive and suggests that the management appreciates the EPS growth and has faith in TerraCom's continuing strength. On the balance of its merits, solid EPS growth and company insiders who are aligned with the shareholders would indicate a business that is worthy of further research. You should always think about risks though. Case in point, we've spotted 2 warning signs for TerraCom you should be aware of, and 1 of them makes us a bit uncomfortable.

While opting for stocks without growing earnings and absent insider buying can yield results, for investors valuing these key metrics, here is a carefully selected list of companies in AU with promising growth potential and insider confidence.

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.