Do Pro Medicus's (ASX:PME) Earnings Warrant Your Attention?

Like a puppy chasing its tail, some new investors often chase 'the next big thing', even if that means buying 'story stocks' without revenue, let alone profit. But as Peter Lynch said in One Up On Wall Street, 'Long shots almost never pay off.'

If, on the other hand, you like companies that have revenue, and even earn profits, then you may well be interested in Pro Medicus (ASX:PME). While profit is not necessarily a social good, it's easy to admire a business that can consistently produce it. In comparison, loss making companies act like a sponge for capital - but unlike such a sponge they do not always produce something when squeezed.

View our latest analysis for Pro Medicus

How Quickly Is Pro Medicus Increasing Earnings Per Share?

If you believe that markets are even vaguely efficient, then over the long term you'd expect a company's share price to follow its earnings per share (EPS). It's no surprise, then, that I like to invest in companies with EPS growth. As a tree reaches steadily for the sky, Pro Medicus's EPS has grown 33% each year, compound, over three years. As a result, we can understand why the stock trades on a high multiple of trailing twelve month earnings.

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. The good news is that Pro Medicus is growing revenues, and EBIT margins improved by 7.5 percentage points to 65%, over the last year. That's great to see, on both counts.

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

You don't drive with your eyes on the rear-view mirror, so you might be more interested in this free report showing analyst forecasts for Pro Medicus's future profits.

Are Pro Medicus Insiders Aligned With All Shareholders?

Like the kids in the streets standing up for their beliefs, insider share purchases give me reason to believe in a brighter future. That's because insider buying often indicates that those closest to the company have confidence that the share price will perform well. However, small purchases are not always indicative of conviction, and insiders don't always get it right.

We note that Pro Medicus insiders spent AU$70k 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.

And the insider buying isn't the only sign of alignment between shareholders and the board, since Pro Medicus insiders own more than a third of the company. Indeed, with a collective holding of 56%, company insiders are in control and have plenty of capital behind the venture. This makes me think they will be incentivised to plan for the long term - something I like to see. And their holding is extremely valuable at the current share price, totalling AU$2.6b. That means they have plenty of their own capital riding on the performance of the business!

While insiders already own a significant amount of shares, and they have been buying more, the good news for ordinary shareholders does not stop there. That's because on our analysis the CEO, Sam Hupert, is paid less than the median for similar sized companies. I discovered that the median total compensation for the CEOs of companies like Pro Medicus with market caps between AU$2.8b and AU$8.9b is about AU$2.8m.

The Pro Medicus CEO received total compensation of just AU$508k in the year to . That's clearly well below average, so at a glance, that arrangement seems generous to shareholders, and points to a modest remuneration culture. CEO remuneration levels are not the most important metric for investors, but when the pay is modest, that does support enhanced alignment between the CEO and the ordinary shareholders. I'd also argue reasonable pay levels attest to good decision making more generally.

Is Pro Medicus Worth Keeping An Eye On?

For growth investors like me, Pro Medicus's raw rate of earnings growth is a beacon in the night. Not only that, but we can see that insiders both own a lot of, and are buying more, shares in the company. So I do think this is one stock worth watching. You should always think about risks though. Case in point, we've spotted 1 warning sign for Pro Medicus you should be aware of.

The good news is that Pro Medicus is not the only growth stock with insider buying. Here's a list of them... with insider buying in the last three months!

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.