Do REA Group's (ASX:REA) Earnings Warrant Your Attention?

By
Simply Wall St
Published
April 08, 2022
ASX:REA
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. But the reality is that when a company loses money each year, for long enough, its investors will usually take their share of those losses.

In the age of tech-stock blue-sky investing, my choice may seem old fashioned; I still prefer profitable companies like REA Group (ASX:REA). While profit is not necessarily a social good, it's easy to admire a business that can consistently produce it. Loss-making companies are always racing against time to reach financial sustainability, but time is often a friend of the profitable company, especially if it is growing.

Check out our latest analysis for REA Group

REA Group'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. Therefore, there are plenty of investors who like to buy shares in companies that are growing EPS. I, for one, am blown away by the fact that REA Group has grown EPS by 44% per year, 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 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. While REA Group did well to grow revenue over the last year, EBIT margins were dampened at the same time. So if EBIT margins can stabilize, this top-line growth should pay off for shareholders.

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:REA Earnings and Revenue History April 8th 2022

The trick, as an investor, is to find companies that are going to perform well in the future, not just in the past. To that end, right now and today, you can check our visualization of consensus analyst forecasts for future REA Group EPS 100% free.

Are REA Group Insiders Aligned With All Shareholders?

Like the kids in the streets standing up for their beliefs, insider share purchases give me reason to believe in a brighter future. Because oftentimes, the purchase of stock is a sign that the buyer views it as undervalued. Of course, we can never be sure what insiders are thinking, we can only judge their actions.

One positive for REA Group, is that company insiders paid AU$55k for shares in the last year. While this isn't much, we also note an absence of sales.

The good news, alongside the insider buying, for REA Group bulls is that insiders (collectively) have a meaningful investment in the stock. Given insiders own a small fortune of shares, currently valued at AU$72m, they have plenty of motivation to push the business to succeed. That's certainly enough to make me think that management will be very focussed on long term growth.

While insiders are apparently happy to hold and accumulate shares, that is just part of the pretty picture. The cherry on top is that the CEO, Owen Wilson is paid comparatively modestly to CEOs at similar sized companies. For companies with market capitalizations over AU$11b, like REA Group, the median CEO pay is around AU$5.3m.

REA Group offered total compensation worth AU$4.4m to its CEO in the year to . That comes in below the average for similar sized companies, and seems pretty reasonable to me. 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. It can also be a sign of a culture of integrity, in a broader sense.

Does REA Group Deserve A Spot On Your Watchlist?

REA Group's earnings per share have taken off like a rocket aimed right at the moon. Just as heartening; insiders both own and are buying more stock. Because of the potential that it has reached an inflection point, I'd suggest REA Group belongs on the top of your watchlist. We should say that we've discovered 1 warning sign for REA Group that you should be aware of before investing here.

There are plenty of other companies that have insiders buying up shares. So if you like the sound of REA Group, you'll probably love this free list of growing companies that insiders are buying.

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

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