Here's Why We Think Definity Financial (TSE:DFY) Is Well Worth Watching

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. But as Peter Lynch said in One Up On Wall Street, 'Long shots almost never pay off.' Loss-making companies are always racing against time to reach financial sustainability, so investors in these companies may be taking on more risk than they should.

Despite being in the age of tech-stock blue-sky investing, many investors still adopt a more traditional strategy; buying shares in profitable companies like Definity Financial (TSE:DFY). While profit isn't the sole metric that should be considered when investing, it's worth recognising businesses that can consistently produce it.

View our latest analysis for Definity Financial

How Quickly Is Definity Financial Increasing Earnings Per Share?

The market is a voting machine in the short term, but a weighing machine in the long term, so you'd expect share price to follow earnings per share (EPS) outcomes eventually. That makes EPS growth an attractive quality for any company. Over the last three years, Definity Financial has grown EPS by 14% per year. That growth rate is fairly good, assuming the company can keep it up.

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. It's noted that Definity Financial's revenue from operations was lower than its revenue in the last twelve months, so that could distort our analysis of its margins. Definity Financial shareholders can take confidence from the fact that EBIT margins are up from 6.8% to 12%, and revenue is growing. Ticking those two boxes is a good sign of growth, in our book.

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

Fortunately, we've got access to analyst forecasts of Definity Financial's future profits. You can do your own forecasts without looking, or you can take a peek at what the professionals are predicting.

Are Definity Financial Insiders Aligned With All Shareholders?

It's a necessity that company leaders act in the best interest of shareholders and so insider investment always comes as a reassurance to the market. Definity Financial followers will find comfort in knowing that insiders have a significant amount of capital that aligns their best interests with the wider shareholder group. To be specific, they have CA$54m worth of shares. This considerable investment should help drive long-term value in the business. Even though that's only about 1.0% of the company, it's enough money to indicate alignment between the leaders of the business and ordinary shareholders.

Should You Add Definity Financial To Your Watchlist?

One positive for Definity Financial is that it is growing EPS. That's nice to see. To add an extra spark to the fire, significant insider ownership in the company is another highlight. That combination is very appealing. So yes, we do think the stock is worth keeping an eye on. Now, you could try to make up your mind on Definity Financial by focusing on just these factors, or you could also consider how its price-to-earnings ratio compares to other companies in its industry.

There's always the possibility of doing well buying stocks that are not growing earnings and do not have insiders buying shares. But for those who consider these important metrics, we encourage you to check out companies that do have those features. You can access a tailored list of Canadian companies which have demonstrated growth backed by significant insider holdings.

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. 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.

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