Stock Analysis

Should You Be Adding Mount Gibson Iron (ASX:MGX) To Your Watchlist Today?

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ASX:MGX
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Some have more dollars than sense, they say, so even companies that have no revenue, no profit, and a record of falling short, can easily find investors. 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.

In contrast to all that, I prefer to spend time on companies like Mount Gibson Iron (ASX:MGX), which has not only revenues, but also profits. While that doesn't make the shares worth buying at any price, you can't deny that successful capitalism requires profit, eventually. 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 Mount Gibson Iron

How Fast Is Mount Gibson Iron Growing Its Earnings Per Share?

Even modest earnings per share growth (EPS) can create meaningful value, when it is sustained reliably from year to year. So it's no surprise that some investors are more inclined to invest in profitable businesses. Like the last firework on New Year's Eve accelerating into the sky, Mount Gibson Iron's EPS shot from AU$0.058 to AU$0.12, over the last year. You don't see 101% year-on-year growth like that, very often.

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. The good news is that Mount Gibson Iron is growing revenues, and EBIT margins improved by 6.7 percentage points to 23%, over the last year. Ticking those two boxes is a good sign of growth, in my book.

You can take a look at the company's revenue and earnings growth trend, in the chart below. Click on the chart to see the exact numbers.

earnings-and-revenue-history
ASX:MGX Earnings and Revenue History August 10th 2020

While it's always good to see growing profits, you should always remember that a weak balance sheet could come back to bite. So check Mount Gibson Iron's balance sheet strength, before getting too excited.

Are Mount Gibson Iron Insiders Aligned With All Shareholders?

I always like to check up on CEO compensation, because I think that reasonable pay levels, around or below the median, can be a sign that shareholder interests are well considered. I discovered that the median total compensation for the CEOs of companies like Mount Gibson Iron with market caps between AU$557m and AU$2.2b is about AU$1.4m.

Mount Gibson Iron offered total compensation worth AU$1.2m 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.

Does Mount Gibson Iron Deserve A Spot On Your Watchlist?

Mount Gibson Iron's earnings per share growth have been levitating higher, like a mountain goat scaling the Alps. With rocketing profits, its seems likely the business has a rosy future; and it may have hit an inflection point. At the same time the reasonable CEO compensation reflects well on the board of directors. So Mount Gibson Iron looks like it could be a good quality growth stock, at first glance. That's worth watching. However, before you get too excited we've discovered 3 warning signs for Mount Gibson Iron (1 is a bit unpleasant!) that you should be aware of.

Although Mount Gibson Iron certainly looks good to me, I would like it more if insiders were buying up shares. If you like to see insider buying, too, then this free list of growing companies that insiders are buying, could be exactly what you're looking for.

Please note the insider transactions discussed in this article refer to reportable transactions in the relevant jurisdiction.

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