Here's Why I Think Gullewa (ASX:GUL) Might Deserve Your Attention Today

By
Simply Wall St
Published
August 11, 2021
ASX:GUL
Source: Shutterstock

For beginners, it can seem like a good idea (and an exciting prospect) to buy a company that tells a good story to investors, even if it completely lacks a track record of revenue and profit. 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). 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 Gullewa

How Fast Is Gullewa Growing?

If a company can keep growing earnings per share (EPS) long enough, its share price will eventually follow. 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 58% per year, over the last three years. Growth that fast may well be fleeting, but like a lotus blooming from a murky pond, it sparks joy for the wary stock pickers.

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. 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. The good news is that Gullewa is growing revenues, and EBIT margins improved by 11.8 percentage points to 65%, over the last year. Ticking those two boxes is a good sign of growth, in my book.

The chart below shows how the company's bottom and top lines have progressed over time. Click on the chart to see the exact numbers.

earnings-and-revenue-history
ASX:GUL Earnings and Revenue History August 12th 2021

Since Gullewa is no giant, with a market capitalization of AU$14m, so you should definitely check its cash and debt before getting too excited about its prospects.

Are Gullewa Insiders Aligned With All Shareholders?

Like standing at the lookout, surveying the horizon at sunrise, insider buying, for some investors, sparks joy. This view is based on the possibility that stock purchases signal bullishness on behalf of the buyer. However, small purchases are not always indicative of conviction, and insiders don't always get it right.

It's worth noting that there was some insider selling of Gullewa shares last year, worth -AU$6.1k. But this is outweighed by the CEO, Company Secretary & Executive Director David Deitz who spent AU$224k buying shares, at an average price of around around AU$0.078.

And the insider buying isn't the only sign of alignment between shareholders and the board, since Gullewa insiders own more than a third of the company. Indeed, with a collective holding of 67%, 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$14m Gullewa is really small for a listed company. That means insiders only have AU$9.4m worth of shares, despite the large proportional holding. That might not be a huge sum but it should be enough to keep insiders motivated!

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$272m, like Gullewa, the median CEO pay is around AU$368k.

The Gullewa CEO received AU$295k in compensation for the year ending . That comes in below the average for similar sized companies, and seems pretty reasonable to me. 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.

Should You Add Gullewa To Your Watchlist?

Gullewa's earnings per share growth have been levitating higher, like a mountain goat scaling the Alps. The incing on the cake is that insiders own a large chunk of the company and one has even 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. We don't want to rain on the parade too much, but we did also find 3 warning signs for Gullewa that you need to be mindful of.

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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