It's only natural that many investors, especially those who are new to the game, prefer to buy shares in 'sexy' stocks with a good story, even if those businesses lose money. But as Peter Lynch said in One Up On Wall Street, 'Long shots almost never pay off.'
So if you're like me, you might be more interested in profitable, growing companies, like Grange Resources (ASX:GRR). 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.
How Fast Is Grange Resources Growing?
The market is a voting machine in the short term, but a weighing machine in the long term, so share price follows earnings per share (EPS) eventually. That makes EPS growth an attractive quality for any company. I, for one, am blown away by the fact that Grange Resources has grown EPS by 45% per year, over the last three years. While that sort of growth rate isn't sustainable for long, it certainly catches my attention; like a crow with a sparkly stone.
One way to double-check a company's growth is to look at how its revenue, and earnings before interest and tax (EBIT) margins are changing. The good news is that Grange Resources is growing revenues, and EBIT margins improved by 22.5 percentage points to 55%, 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.
While profitability drives the upside, prudent investors always check the balance sheet, too.
Are Grange Resources Insiders Aligned With All Shareholders?
Like that fresh smell in the air when the rains are coming, insider buying fills me with optimistic anticipation. 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.
Like a sturdy phalanx Grange Resources insiders have stood united by refusing to sell shares over the last year. But the bigger deal is that the CEO, MD & Executive Director, Honglin Zhao, paid AU$265k to buy shares at an average price of AU$0.60.
On top of the insider buying, it's good to see that Grange Resources insiders have a valuable investment in the business. Given insiders own a small fortune of shares, currently valued at AU$85m, they have plenty of motivation to push the business to succeed. That holding amounts to 9.5% of the stock on issue, thus making insiders influential, and aligned, owners of the business.
While insiders are apparently happy to hold and accumulate shares, that is just part of the pretty picture. That's because on our analysis the CEO, Honglin Zhao, is paid less than the median for similar sized companies. For companies with market capitalizations between AU$551m and AU$2.2b, like Grange Resources, the median CEO pay is around AU$1.3m.
Grange Resources offered total compensation worth AU$888k to its CEO in the year to . That seems pretty reasonable, especially given its below the median for similar sized companies. While the level of CEO compensation isn't a huge factor in my view of the company, modest remuneration is a positive, because it suggests that the board keeps shareholder interests in mind. I'd also argue reasonable pay levels attest to good decision making more generally.
Is Grange Resources Worth Keeping An Eye On?
Grange Resources's earnings per share growth have been levitating higher, like a mountain goat scaling the Alps. The cherry on top is that insiders own a bunch of shares, and one has been buying more. Because of the potential that it has reached an inflection point, I'd suggest Grange Resources belongs on the top of your watchlist. Don't forget that there may still be risks. For instance, we've identified 2 warning signs for Grange Resources that you should be aware of.
There are plenty of other companies that have insiders buying up shares. So if you like the sound of Grange Resources, 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.