Stock Analysis

We Ran A Stock Scan For Earnings Growth And Etherstack (ASX:ESK) Passed With Ease

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It's common for many investors, especially those who are inexperienced, to buy shares in companies with a good story even if these companies are loss-making. Sometimes these stories can cloud the minds of investors, leading them to invest with their emotions rather than on the merit of good company fundamentals. A loss-making company is yet to prove itself with profit, and eventually the inflow of external capital may dry up.

So if this idea of high risk and high reward doesn't suit, you might be more interested in profitable, growing companies, like Etherstack (ASX:ESK). Even if this company is fairly valued by the market, investors would agree that generating consistent profits will continue to provide Etherstack with the means to add long-term value to shareholders.

See our latest analysis for Etherstack

Etherstack's Improving Profits

Over the last three years, Etherstack has grown earnings per share (EPS) at as impressive rate from a relatively low point, resulting in a three year percentage growth rate that isn't particularly indicative of expected future performance. Thus, it makes sense to focus on more recent growth rates, instead. To the delight of shareholders, Etherstack's EPS soared from US$0.011 to US$0.017, over the last year. That's a impressive gain of 50%.

It's often helpful to take a look at earnings before interest and tax (EBIT) margins, as well as revenue growth, to get another take on the quality of the company's growth. While we note Etherstack achieved similar EBIT margins to last year, revenue grew by a solid 14% to US$9.7m. That's progress.

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.

ASX:ESK Earnings and Revenue History March 15th 2023

Since Etherstack is no giant, with a market capitalisation of AU$63m, you should definitely check its cash and debt before getting too excited about its prospects.

Are Etherstack Insiders Aligned With All Shareholders?

It's said that there's no smoke without fire. For investors, insider buying is often the smoke that indicates which stocks could set the market alight. This view is based on the possibility that stock purchases signal bullishness on behalf of the buyer. Of course, we can never be sure what insiders are thinking, we can only judge their actions.

The good news for Etherstack shareholders is that no insiders reported selling shares in the last year. So it's definitely nice that Non-Executive Chairman Peter Francis Stephens bought US$36k worth of shares at an average price of around US$0.40. Purchases like this can help the investors understand the views of the management team; in which case they see some potential in Etherstack.

On top of the insider buying, we can also see that Etherstack insiders own a large chunk of the company. To be exact, company insiders hold 71% of the company, so their decisions have a significant impact on their investments. Intuition will tell you this is a good sign because it suggests they will be incentivised to build value for shareholders over the long term. With that sort of holding, insiders have about US$45m riding on the stock, at current prices. So there's plenty there to keep them focused!

Should You Add Etherstack To Your Watchlist?

For growth investors, Etherstack's raw rate of earnings growth is a beacon in the night. Moreover, the management and board of the company hold a significant stake in the company, with one party adding to this total. So it's fair to say that this stock may well deserve a spot on your watchlist. You still need to take note of risks, for example - Etherstack has 2 warning signs (and 1 which is a bit unpleasant) we think you should know about.

There are plenty of other companies that have insiders buying up shares. So if you like the sound of Etherstack, 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.

Valuation is complex, but we're helping make it simple.

Find out whether Etherstack is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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