Is Now The Time To Put Gullewa (ASX:GUL) On Your Watchlist?

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. 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). Even if the shares are fully valued today, most capitalists would recognize its profits as the demonstration of steady value generation. While a well funded company may sustain losses for years, unless its owners have an endless appetite for subsidizing the customer, it will need to generate a profit eventually, or else breathe its last breath.

Check out our latest analysis for Gullewa

Gullewa's Earnings Per Share Are 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. Who among us would not applaud Gullewa's stratospheric annual EPS growth of 58%, compound, over the last three years? That sort of growth never lasts long, but like a shooting star it is well worth watching when it happens.

I like to see top-line growth as an indication that growth is sustainable, and I look for a high earnings before interest and taxation (EBIT) margin to point to a competitive moat (though some companies with low margins also have moats). 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 53% to 65%, 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. For finer detail, click on the image.

Gullewa isn't a huge company, given its market capitalization of AU$15m. That makes it extra important to check on its balance sheet strength.

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.

For the sake of balance, I do note Gullewa insiders sold -AU$87k worth of shares last year. But that is far less than the large AU$224k share acquisition by CEO, Company Secretary & Executive Director David Deitz.

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. In fact, they own 67% of the company, so they will share in the same delights and challenges experienced by the ordinary shareholders. This makes me think they will be incentivised to plan for the long term - something I like to see. Valued at only AU$15m Gullewa is really small for a listed company. That means insiders only have AU$10m worth of shares, despite the large proportional holding. 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. I discovered that the median total compensation for the CEOs of companies like Gullewa with market caps under AU$258m is about AU$369k.

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. 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.

Does Gullewa Deserve A Spot On Your Watchlist?

Gullewa'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 Gullewa belongs on the top of your watchlist. However, before you get too excited we've discovered 4 warning signs for Gullewa that you should be aware of.

As a growth investor I do like to see insider buying. But Gullewa isn't the only one. You can see a a free list of them here.

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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