Do Champion Iron's (ASX:CIA) 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.'

In contrast to all that, I prefer to spend time on companies like Champion Iron (ASX:CIA), which has not only revenues, but also profits. Now, I'm not saying that the stock is necessarily undervalued today; but I can't shake an appreciation for the profitability of the business itself. In comparison, loss making companies act like a sponge for capital - but unlike such a sponge they do not always produce something when squeezed.

See our latest analysis for Champion Iron

Champion Iron's Improving Profits

In the last three years Champion Iron's earnings per share took off like a rocket; fast, and from a low base. So the actual rate of growth doesn't tell us much. Thus, it makes sense to focus on more recent growth rates, instead. Like the last firework on New Year's Eve accelerating into the sky, Champion Iron's EPS shot from CA$0.51 to CA$1.22, over the last year. Year on year growth of 137% is certainly a sight to behold. The best case scenario? That the business has hit a true inflection point.

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 Champion Iron is growing revenues, and EBIT margins improved by 19.7 percentage points to 66%, over the last year. That's great to see, on both counts.

In the chart below, you can see how the company has grown earnings, and revenue, over time. For finer detail, click on the image.

Fortunately, we've got access to analyst forecasts of Champion Iron's future profits. You can do your own forecasts without looking, or you can take a peek at what the professionals are predicting.

Are Champion Iron 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. Of course, we can never be sure what insiders are thinking, we can only judge their actions.

Not only did Champion Iron insiders refrain from selling stock during the year, but they also spent CA$228k buying it. That puts the company in a nice light, as it makes me think its leaders are feeling confident. It is also worth noting that it was Independent Non-Executive Director Gary Kenneth Lawler who made the biggest single purchase, worth AU$88k, paying AU$4.46 per share.

Along with the insider buying, another encouraging sign for Champion Iron is that insiders, as a group, have a considerable shareholding. Notably, they have an enormous stake in the company, worth CA$341m. Coming in at 14% of the business, that holding gives insiders a lot of influence, and plenty of reason to generate value for shareholders. Very encouraging.

Is Champion Iron Worth Keeping An Eye On?

Champion Iron's earnings per share growth have been levitating higher, like a mountain goat scaling the Alps. Just as heartening; insiders both own and are buying more stock. Because of the potential that it has reached an inflection point, I'd suggest Champion Iron belongs on the top of your watchlist. You should always think about risks though. Case in point, we've spotted 3 warning signs for Champion Iron you should be aware of, and 2 of them don't sit too well with us.

There are plenty of other companies that have insiders buying up shares. So if you like the sound of Champion Iron, 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.