Stock Analysis

Here's Why I Think Circa Enterprises (CVE:CTO) Is An Interesting Stock

TSXV:CTO
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It's only natural that many investors, especially those who are new to the game, prefer to buy shares in 'sexy' stocks with a good story, even if those businesses lose money. But as Peter Lynch said in One Up On Wall Street, 'Long shots almost never pay off.'

If, on the other hand, you like companies that have revenue, and even earn profits, then you may well be interested in Circa Enterprises (CVE:CTO). 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 Circa Enterprises

How Fast Is Circa Enterprises Growing?

If you believe that markets are even vaguely efficient, then over the long term you'd expect a company's share price to follow its earnings per share (EPS). It's no surprise, then, that I like to invest in companies with EPS growth. Who among us would not applaud Circa Enterprises's stratospheric annual EPS growth of 38%, compound, over the last three years? While that sort of growth rate isn't sustainable for long, it certainly catches my attention; like a crow with a sparkly stone.

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). Circa Enterprises's EBIT margins are flat but, of some concern, its revenue is actually down. Suffice it to say that is not a great sign of growth.

In the chart below, you can see how the company has grown earnings, and revenue, over time. For finer detail, click on the image.

earnings-and-revenue-history
TSXV:CTO Earnings and Revenue History December 14th 2020

Since Circa Enterprises is no giant, with a market capitalization of CA$9.6m, so you should definitely check its cash and debt before getting too excited about its prospects.

Are Circa Enterprises 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.

In the last twelve months Circa Enterprises insiders spent CA$21k on stock; good news for shareholders. While this isn't much, we also note an absence of sales. We also note that it was the President, Cory Tamagi, who made the biggest single acquisition, paying CA$18k for shares at about CA$0.70 each.

And the insider buying isn't the only sign of alignment between shareholders and the board, since Circa Enterprises insiders own more than a third of the company. In fact, they own 49% 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. Valued at only CA$9.6m Circa Enterprises is really small for a listed company. That means insiders only have CA$4.7m worth of shares, despite the large proportional holding. That's not a huge stake in absolute terms, but it should help keep insiders aligned with other shareholders.

Does Circa Enterprises Deserve A Spot On Your Watchlist?

Circa Enterprises's earnings per share have taken off like a rocket aimed right at the moon. Just as heartening; insiders both own and are buying more stock. Because of the potential that it has reached an inflection point, I'd suggest Circa Enterprises belongs on the top of your watchlist. However, before you get too excited we've discovered 4 warning signs for Circa Enterprises (2 are concerning!) that you should be aware of.

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

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

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This article by Simply Wall St is general in nature. 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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