Do Gullewa's (ASX:GUL) Earnings Warrant Your Attention?

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. And in their study titled Who Falls Prey to the Wolf of Wall Street?' Leuz et. al. found that it is 'quite common' for investors to lose money by buying into 'pump and dump' schemes.

So if you're like me, you might be more interested in profitable, growing companies, like Gullewa (ASX:GUL). Even if the shares are fully valued today, most capitalists would recognize its profits as the demonstration of steady value generation. Loss-making companies are always racing against time to reach financial sustainability, but time is often a friend of the profitable company, especially if it is growing.

View our latest analysis for Gullewa

How Quickly Is Gullewa Increasing Earnings Per Share?

As one of my mentors once told me, share price follows earnings per share (EPS). It's no surprise, then, that I like to invest in companies with EPS growth. I, for one, am blown away by the fact that Gullewa has grown EPS by 51% 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.

I like to take a look at earnings before interest and (EBIT) tax margins, as well as revenue growth, to get another take on the quality of the company's growth. I note that Gullewa's revenue from operations was lower than its revenue in the last twelve months, so that could distort my analysis of its margins. Gullewa shareholders can take confidence from the fact that EBIT margins are up from 56% to 68%, and revenue is growing. Ticking those two boxes is a good sign of growth, in my book.

In the chart below, you can see how the company has grown earnings, and revenue, over time. Click on the chart to see the exact numbers.

Since Gullewa is no giant, with a market capitalization of AU$15m, so you should definitely check its cash and debt before getting too excited about its prospects.

Are Gullewa 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. Because oftentimes, the purchase of stock is a sign that the buyer views it as undervalued. However, small purchases are not always indicative of conviction, and insiders don't always get it right.

Insiders both bought and sold Gullewa shares in the last year, but the good news is they spent AU$55k more buying than they netted selling. So, on balance, the insider transactions are mildly encouraging. We also note that it was the , Cyril Bell, who made the biggest single acquisition, paying AU$103k for shares at about AU$0.056 each.

On top of the insider buying, we can also see that Gullewa insiders own a large chunk of the company. Indeed, with a collective holding of 68%, company insiders are in control and have plenty of capital behind the venture. To me this is a good sign because it suggests they will be incentivised to build value for shareholders over the long term. Valued at only AU$15m Gullewa is really small for a listed company. So despite a large proportional holding, insiders only have AU$10m worth of stock. That's not a huge stake in absolute terms, but it should help keep insiders aligned with other shareholders.

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, David Deitz, is paid less than the median for similar sized companies. For companies with market capitalizations under AU$263m, like Gullewa, the median CEO pay is around AU$380k.

Gullewa offered total compensation worth AU$295k to its CEO in the year to . That seems pretty reasonable, especially given its below the median for similar sized companies. 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. It can also be a sign of good governance, more generally.

Should You Add Gullewa To Your Watchlist?

Gullewa's earnings per share have taken off like a rocket aimed right at the moon. What's more insiders own a significant stake in the company and have been buying more shares. Because of the potential that it has reached an inflection point, I'd suggest Gullewa belongs on the top of your watchlist. Even so, be aware that Gullewa is showing 5 warning signs in our investment analysis , you should know about...

The good news is that Gullewa 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. 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.
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