Does NexgenRx (CVE:NXG) Deserve A Spot On Your Watchlist?

For beginners, it can seem like a good idea (and an exciting prospect) to buy a company that tells a good story to investors, even if it completely lacks a track record of revenue and profit. But as Warren Buffett has mused, 'If you've been playing poker for half an hour and you still don't know who the patsy is, you're the patsy.' When they buy such story stocks, investors are all too often the patsy.

So if you're like me, you might be more interested in profitable, growing companies, like NexgenRx (CVE:NXG). Even if the shares are fully valued today, most capitalists would recognize its profits as the demonstration of steady value generation. 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.

See our latest analysis for NexgenRx

NexgenRx's Improving Profits

In the last three years NexgenRx's earnings per share took off like a rocket; fast, and from a low base. So the actual rate of growth doesn't tell us much. Thus, it makes sense to focus on more recent growth rates, instead. Like a wedge-tailed eagle on the wind, NexgenRx's EPS soared from CA$0.017 to CA$0.028, in just one year. That's a commendable gain of 60%.

Careful consideration of revenue growth and earnings before interest and taxation (EBIT) margins can help inform a view on the sustainability of the recent profit growth. I note that, last year, NexgenRx's revenue from operations was lower than its revenue, so that could distort my analysis of its margins. On the one hand, NexgenRx's EBIT margins fell over the last year, but on the other hand, revenue grew. So it seems the future my hold further growth, especially if EBIT margins can stabilize.

You can take a look at the company's revenue and earnings growth trend, in the chart below. Click on the chart to see the exact numbers.

NexgenRx isn't a huge company, given its market capitalization of CA$29m. That makes it extra important to check on its balance sheet strength.

Are NexgenRx 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. Of course, we can never be sure what insiders are thinking, we can only judge their actions.

Not only did NexgenRx insiders refrain from selling stock during the year, but they also spent CA$182k buying it. That's nice to see, because it suggests insiders are optimistic. It is also worth noting that it was Paul Crossett who made the biggest single purchase, worth CA$16k, paying CA$0.34 per share.

On top of the insider buying, we can also see that NexgenRx insiders own a large chunk of the company. In fact, they own 37% 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. Of course, NexgenRx is a very small company, with a market cap of only CA$29m. That means insiders only have CA$11m 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.

While insiders already own a significant amount of shares, and they have been buying more, the good news for ordinary shareholders does not stop there. The cherry on top is that the CEO, Ron Loucks is paid comparatively modestly to CEOs at similar sized companies. For companies with market capitalizations under CA$256m, like NexgenRx, the median CEO pay is around CA$209k.

The NexgenRx CEO received CA$153k in compensation for the year ending . That seems pretty reasonable, especially given its below the median for similar sized companies. While the level of CEO compensation isn't a huge factor in my view of the company, modest remuneration is a positive, because it suggests that the board keeps shareholder interests in mind. It can also be a sign of good governance, more generally.

Should You Add NexgenRx To Your Watchlist?

You can't deny that NexgenRx has grown its earnings per share at a very impressive rate. That's attractive. On top of that, insiders own a significant stake in the company and have been buying more shares. So I do think this is one stock worth watching. We don't want to rain on the parade too much, but we did also find 2 warning signs for NexgenRx that you need to be mindful of.

As a growth investor I do like to see insider buying. But NexgenRx isn't the only one. You can see a a free list of them here.

Please note the insider transactions discussed in this article refer to reportable transactions in the relevant jurisdiction.

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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