Stock Analysis

Here's Why We Think Vita Life Sciences (ASX:VLS) Is Well Worth Watching

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ASX:VLS
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Like a puppy chasing its tail, some new investors often chase 'the next big thing', even if that means buying 'story stocks' without revenue, let alone profit. But as Warren Buffett has mused, 'If you've been playing poker for half an hour and you still don't know who the patsy is, you're the patsy.' When they buy such story stocks, investors are all too often the patsy.

In contrast to all that, I prefer to spend time on companies like Vita Life Sciences (ASX:VLS), which has not only revenues, but also profits. 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.

See our latest analysis for Vita Life Sciences

How Fast Is Vita Life Sciences Growing?

As one of my mentors once told me, share price follows earnings per share (EPS). Therefore, there are plenty of investors who like to buy shares in companies that are growing EPS. As a tree reaches steadily for the sky, Vita Life Sciences's EPS has grown 27% each year, compound, over three years. If the company can sustain that sort of growth, we'd expect shareholders to come away winners.

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). The good news is that Vita Life Sciences is growing revenues, and EBIT margins improved by 4.9 percentage points to 16%, 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. To see the actual numbers, click on the chart.

earnings-and-revenue-history
ASX:VLS Earnings and Revenue History December 23rd 2020

Since Vita Life Sciences is no giant, with a market capitalization of AU$54m, so you should definitely check its cash and debt before getting too excited about its prospects.

Are Vita Life Sciences Insiders Aligned With All Shareholders?

Personally, I like to see high insider ownership of a company, since it suggests that it will be managed in the interests of shareholders. So we're pleased to report that Vita Life Sciences insiders own a meaningful share of the business. Actually, with 47% of the company to their names, insiders are profoundly invested in the business. I'm reassured by this kind of alignment, as it suggests the business will be run for the benefit of shareholders. With that sort of holding, insiders have about AU$25m riding on the stock, at current prices. That's nothing to sneeze at!

Should You Add Vita Life Sciences To Your Watchlist?

Given my belief that share price follows earnings per share you can easily imagine how I feel about Vita Life Sciences's strong EPS growth. Further, the high level of insider ownership impresses me, and suggests that I'm not the only one who appreciates the EPS growth. Fast growth and confident insiders should be enough to warrant further research. So the answer is that I do think this is a good stock to follow along with. However, before you get too excited we've discovered 3 warning signs for Vita Life Sciences (1 is concerning!) that you should be aware of.

Although Vita Life Sciences 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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