Here's Why We Think Cochlear (ASX:COH) 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. 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 can act like a sponge for capital - so investors should be cautious that they're not throwing good money after bad.

In contrast to all that, many investors prefer to focus on companies like Cochlear (ASX:COH), 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.

See our latest analysis for Cochlear

How Quickly Is Cochlear Increasing Earnings Per Share?

The market is a voting machine in the short term, but a weighing machine in the long term, so you'd expect share price to follow earnings per share (EPS) outcomes eventually. That makes EPS growth an attractive quality for any company. Shareholders will be happy to know that Cochlear's EPS has grown 34% each year, compound, over three years. This has no doubt fuelled the optimism that sees the stock trading on a high multiple of earnings.

It's often helpful to take a look at earnings before interest and tax (EBIT) margins, as well as revenue growth, to get another take on the quality of the company's growth. EBIT margins for Cochlear remained fairly unchanged over the last year, however the company should be pleased to report its revenue growth for the period of 25% to AU$2.1b. That's progress.

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.

In investing, as in life, the future matters more than the past. So why not check out this free interactive visualization of Cochlear's forecast profits?

Are Cochlear 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. That's because insider buying often indicates that those closest to the company have confidence that the share price will perform well. Of course, we can never be sure what insiders are thinking, we can only judge their actions.

We note that Cochlear insiders spent AU$285k on stock, over the last year; in contrast, we didn't see any selling. That's nice to see, because it suggests insiders are optimistic. Zooming in, we can see that the biggest insider purchase was by Independent Non-Executive Director Christine McLoughlin for AU$68k worth of shares, at about AU$271 per share.

Along with the insider buying, another encouraging sign for Cochlear is that insiders, as a group, have a considerable shareholding. With a whopping AU$85m worth of shares as a group, insiders have plenty riding on the company's success. This would indicate that the goals of shareholders and management are one and the same.

Should You Add Cochlear To Your Watchlist?

If you believe that share price follows earnings per share you should definitely be delving further into Cochlear's strong EPS growth. Not only that, but we can see that insiders both own a lot of, and are buying more shares in the company. So it's fair to say that this stock may well deserve a spot on your watchlist. Of course, profit growth is one thing but it's even better if Cochlear 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.

Keen growth investors love to see insider buying. Thankfully, Cochlear isn't the only one. You can see a a curated list of Australian companies which have exhibited consistent growth accompanied by recent insider 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.