Here's Why We Think McGrath (ASX:MEA) Is Well Worth Watching

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. 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.

So if you're like me, you might be more interested in profitable, growing companies, like McGrath (ASX:MEA). 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 McGrath

How Fast Is McGrath Growing Its Earnings Per Share?

In the last three years McGrath's earnings per share took off like a rocket; fast, and from a low base. So the actual rate of growth doesn't tell us much. As a result, I'll zoom in on growth over the last year, instead. Like the last firework on New Year's Eve accelerating into the sky, McGrath's EPS shot from AU$0.059 to AU$0.11, over the last year. You don't see 85% year-on-year growth like that, very often. That could be a sign that the business has reached a true inflection point.

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 McGrath is growing revenues, and EBIT margins improved by 9.5 percentage points to 16%, 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. For finer detail, click on the image.

Since McGrath is no giant, with a market capitalization of AU$61m, so you should definitely check its cash and debt before getting too excited about its prospects.

Are McGrath Insiders Aligned With All Shareholders?

Many consider high insider ownership to be a strong sign of alignment between the leaders of a company and the ordinary shareholders. So we're pleased to report that McGrath insiders own a meaningful share of the business. In fact, they own 42% of the shares, making insiders a very influential shareholder group. I'm always comforted by solid insider ownership like this, as it implies that those running the business are genuinely motivated to create shareholder value. In terms of absolute value, insiders have AU$26m invested in the business, using the current share price. That should be more than enough to keep them focussed on creating shareholder value!

Is McGrath Worth Keeping An Eye On?

McGrath's earnings have taken off like any random crypto-currency did, back in 2017. That sort of growth is nothing short of eye-catching, and the large investment held by insiders certainly brightens my view of the company. The hope is, of course, that the strong growth marks a fundamental improvement in the business economics. So yes, on this short analysis I do think it's worth considering McGrath for a spot on your watchlist. Before you take the next step you should know about the 4 warning signs for McGrath that we have uncovered.

Although McGrath 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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.