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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. Unfortunately, high risk investments often have little probability of ever paying off, and many investors pay a price to learn their lesson.
If, on the other hand, you like companies that have revenue, and even earn profits, then you may well be interested in Gullewa (ASX:GUL). While profit is not necessarily a social good, it’s easy to admire a business than 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.
See our latest analysis for Gullewa
How Fast Is Gullewa Growing Its Earnings Per Share?
In business, though not in life, profits are a key measure of success; and share prices tend to reflect earnings per share (EPS). So like the hint of a smile on a face that I love, growing EPS generally makes me look twice. It is therefore awe-striking that Gullewa’s EPS went from AU$0.0028 to AU$0.0096 in just one year. Even though that growth rate is unlikely to be repeated, that looks like a breakout improvement.
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. Not all of Gullewa’s revenue this year is revenue from operations, so keep in mind the revenue and margin numbers I’ve used might not be the best representation of the underlying business. Gullewa shareholders can take confidence from the fact that EBIT margins are up from 47% to 63%, and revenue is growing. 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.
Gullewa isn’t a huge company, given its market capitalization of AU$4.8m. That makes it extra important to check on its balance sheet strength.
Are Gullewa 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. However, small purchases are not always indicative of conviction, and insiders don’t always get it right.
We do note that Gullewa insiders netted -AU$3.5k worth of shares over the last year. On the other hand, Chairman of the Board Anthony Howland-Rose paid AU$14k for shares, at a price of about AU$0.026 per share. And that’s a reason to be optimistic.
On top of the insider buying, we can also see that Gullewa insiders own a large chunk of the company. Actually, with 47% of the company to their names, insiders are profoundly invested in the business. I’m reassured by this kind of alignment, as it suggests the business will be run for the benefit of shareholders. Of course, Gullewa is a very small company, with a market cap of only AU$4.8m. So despite a large proportional holding, insiders only have AU$2.3m 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. The cherry on top is that the CEO, David Deitz is paid comparatively modestly to CEOs at similar sized companies. For companies with market capitalizations under AU$287m, like Gullewa, the median CEO pay is around AU$357k.
The Gullewa CEO received AU$215k in compensation for the year ending June 2018. That comes in below the average for similar sized companies, and seems pretty reasonable to me. CEO compensation is hardly the most important aspect of a company to consider, but when its reasonable that does give me a little more confidence that leadership are looking out for shareholder interests. It can also be a sign of a culture of integrity, in a broader sense.
Should You Add Gullewa To Your Watchlist?
Gullewa’s earnings per share have taken off like a rocket aimed right at the moon. Better yet, we can observe insider buying and the chief executive pay looks reasonable. The strong EPS growth suggests Gullewa may be at an inflection point. If so, then it the potential for further gains probably merit a spot on your watchlist. Of course, profit growth is one thing but it’s even better if Gullewa 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.
The good news is that Gullewa is not the only growth stock with insider buying. Here’s a 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
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.