If You Like EPS Growth Then Check Out Wesfarmers (ASX:WES) Before It's Too Late

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. Unfortunately, high risk investments often have little probability of ever paying off, and many investors pay a price to learn their lesson.

In contrast to all that, I prefer to spend time on companies like Wesfarmers (ASX:WES), which has not only revenues, but also profits. Now, I'm not saying that the stock is necessarily undervalued today; but I can't shake an appreciation for the profitability of the business itself. While a well funded company may sustain losses for years, unless its owners have an endless appetite for subsidizing the customer, it will need to generate a profit eventually, or else breathe its last breath.

Check out our latest analysis for Wesfarmers

How Fast Is Wesfarmers Growing?

If a company can keep growing earnings per share (EPS) long enough, its share price will eventually follow. Therefore, there are plenty of investors who like to buy shares in companies that are growing EPS. Wesfarmers managed to grow EPS by 6.6% per year, over three years. That might not be particularly high growth, but it does show that per-share earnings are moving steadily in the right direction.

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). Wesfarmers reported flat revenue and EBIT margins over the last year. That's not bad, but it doesn't point to ongoing future growth, either.

In the chart below, you can see how the company has grown earnings, and revenue, over time. Click on the chart to see the exact numbers.

Of course the knack is to find stocks that have their best days in the future, not in the past. You could base your opinion on past performance, of course, but you may also want to check this interactive graph of professional analyst EPS forecasts for Wesfarmers.

Are Wesfarmers Insiders Aligned With All Shareholders?

Like standing at the lookout, surveying the horizon at sunrise, insider buying, for some investors, sparks joy. Because oftentimes, the purchase of stock is a sign that the buyer views it as undervalued. However, insiders are sometimes wrong, and we don't know the exact thinking behind their acquisitions.

Any way you look at it Wesfarmers shareholders can gain quiet confidence from the fact that insiders shelled out AU$626k to buy stock, over the last year. And when you consider that there was no insider selling, you can understand why shareholders might believe that lady luck will grace this business. Zooming in, we can see that the biggest insider purchase was by Non Executive Director Anil Sabharwal for AU$244k worth of shares, at about AU$48.81 per share.

On top of the insider buying, it's good to see that Wesfarmers insiders have a valuable investment in the business. With a whopping AU$141m worth of shares as a group, insiders have plenty riding on the company's success. This should keep them focused on creating long term value for shareholders.

Does Wesfarmers Deserve A Spot On Your Watchlist?

One important encouraging feature of Wesfarmers is that it is growing profits. On top of that, we've seen insiders buying shares even though they already own plenty. That makes the company a prime candidate for my watchlist - and arguably a research priority. However, before you get too excited we've discovered 1 warning sign for Wesfarmers that you should be aware of.

The good news is that Wesfarmers 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.