Stock Analysis

If You Like EPS Growth Then Check Out Circa Enterprises (CVE:CTO) Before It's Too Late

TSXV:CTO
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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. But the reality is that when a company loses money each year, for long enough, its investors will usually take their share of those losses.

In the age of tech-stock blue-sky investing, my choice may seem old fashioned; I still prefer profitable companies like 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. In comparison, loss making companies act like a sponge for capital - but unlike such a sponge they do not always produce something when squeezed.

View 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). That means EPS growth is considered a real positive by most successful long-term investors. It certainly is nice to see that Circa Enterprises has managed to grow EPS by 23% per year over three years. As a general rule, we'd say that if a company can keep up that sort of growth, shareholders will be smiling.

One way to double-check a company's growth is to look at how its revenue, and earnings before interest and tax (EBIT) margins are changing. While revenue is looking a bit flat, the good news is EBIT margins improved by 2.7 percentage points to 6.4%, in the last twelve months. That's something to smile about.

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 March 17th 2021

Since Circa Enterprises is no giant, with a market capitalization of CA$11m, 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. This view is based on the possibility that stock purchases signal bullishness on behalf of the buyer. However, small purchases are not always indicative of conviction, and insiders don't always get it right.

One positive for Circa Enterprises, is that company insiders paid CA$30k for shares in the last year. This might not be a huge sum, but it's well worth noting anyway, given the complete lack of selling. Zooming in, we can see that the biggest insider purchase was by President Cory Tamagi for CA$18k worth of shares, at about CA$0.70 per share.

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 48% of the shares, making insiders a very influential shareholder group. I'm reassured by this kind of alignment, as it suggests the business will be run for the benefit of shareholders. Valued at only CA$11m Circa Enterprises is really small for a listed company. That means insiders only have CA$5.3m 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?

You can't deny that Circa Enterprises has grown its earnings per share at a very impressive rate. That's attractive. Not only that, but we can see that insiders both own a lot of, and are buying more, shares in the company. So I do think this is one stock worth watching. We should say that we've discovered 2 warning signs for Circa Enterprises (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

The good news is that Circa Enterprises 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.

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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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