Shareholders might want to keep a close eye on Xero Limited (ASX:XRO) after insiders sold NZ$650m stock earlier this year

While Xero Limited (ASX:XRO) shareholders have had a good week with the stock up 3.8%, they shouldn't let their guards down. In spite of the relatively cheap prices, insiders made the decision to sell NZ$650m worth of stock in the last 12 months. This could be a warning indicator of vulnerabilities in the future.

While we would never suggest that investors should base their decisions solely on what the directors of a company have been doing, logic dictates you should pay some attention to whether insiders are buying or selling shares.

See our latest analysis for Xero

The Last 12 Months Of Insider Transactions At Xero

The Founder & Non-Executive Director, Rod Drury, made the biggest insider sale in the last 12 months. That single transaction was for AU$240m worth of shares at a price of AU$134 each. That means that an insider was selling shares at slightly below the current price (AU$148). We generally consider it a negative if insiders have been selling, especially if they did so below the current price, because it implies that they considered a lower price to be reasonable. While insider selling is not a positive sign, we can't be sure if it does mean insiders think the shares are fully valued, so it's only a weak sign. This single sale was just 13% of Rod Drury's stake.

Happily, we note that in the last year insiders paid AU$101m for 1.01m shares. On the other hand they divested 5.41m shares, for AU$650m. In total, Xero insiders sold more than they bought over the last year. The chart below shows insider transactions (by companies and individuals) over the last year. If you click on the chart, you can see all the individual transactions, including the share price, individual, and the date!

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Insider Ownership of Xero

Another way to test the alignment between the leaders of a company and other shareholders is to look at how many shares they own. I reckon it's a good sign if insiders own a significant number of shares in the company. It's great to see that Xero insiders own 13% of the company, worth about AU$2.9b. Most shareholders would be happy to see this sort of insider ownership, since it suggests that management incentives are well aligned with other shareholders.

What Might The Insider Transactions At Xero Tell Us?

It doesn't really mean much that no insider has traded Xero shares in the last quarter. While we feel good about high insider ownership of Xero, we can't say the same about the selling of shares. In addition to knowing about insider transactions going on, it's beneficial to identify the risks facing Xero. When we did our research, we found 3 warning signs for Xero (1 is a bit concerning!) that we believe deserve your full attention.

If you would prefer to check out another company -- one with potentially superior financials -- then do not miss this free list of interesting companies, that have HIGH return on equity and low debt.

For the purposes of this article, insiders are those individuals who report their transactions to the relevant regulatory body. We currently account for open market transactions and private dispositions, but not derivative transactions.

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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.
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