Here's Why I Think Red River Resources (ASX:RVR) Is An Interesting Stock

By
Simply Wall St
Published
June 07, 2021
ASX:RVR
Source: Shutterstock

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. But as Peter Lynch said in One Up On Wall Street, 'Long shots almost never pay off.'

So if you're like me, you might be more interested in profitable, growing companies, like Red River Resources (ASX:RVR). 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.

Check out our latest analysis for Red River Resources

How Quickly Is Red River Resources Increasing Earnings Per Share?

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. As a tree reaches steadily for the sky, Red River Resources's EPS has grown 24% each year, compound, over three years. As a general rule, we'd say that if a company can keep up that sort of growth, shareholders will be smiling.

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 Red River Resources is growing revenues, and EBIT margins improved by 8.5 percentage points to 11%, 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:RVR Earnings and Revenue History June 8th 2021

Red River Resources isn't a huge company, given its market capitalization of AU$116m. That makes it extra important to check on its balance sheet strength.

Are Red River Resources Insiders Aligned With All Shareholders?

Like standing at the lookout, surveying the horizon at sunrise, insider buying, for some investors, sparks joy. That's because insider buying often indicates that those closest to the company have confidence that the share price will perform well. However, insiders are sometimes wrong, and we don't know the exact thinking behind their acquisitions.

We haven't seen any insiders selling Red River Resources shares, in the last year. With that in mind, it's heartening that Timothy Stephen Hanlon, the Independent Non-Executive Director of the company, paid AU$35k for shares at around AU$0.24 each.

Should You Add Red River Resources To Your Watchlist?

Given my belief that share price follows earnings per share you can easily imagine how I feel about Red River Resources's strong EPS growth. Not only is that growth rate rather juicy, but the insider buying makes my mouth water. To put it succinctly; Red River Resources is a strong candidate for your watchlist. It's still necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Red River Resources , and understanding it should be part of your investment process.

The good news is that Red River Resources 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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