Here's Why We Think China Merchants Bank (SHSE:600036) 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 the reality is that when a company loses money each year, for long enough, its investors will usually take their share of those losses. A loss-making company is yet to prove itself with profit, and eventually the inflow of external capital may dry up.

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 China Merchants Bank (SHSE:600036). Now this is not to say that the company presents the best investment opportunity around, but profitability is a key component to success in business.

Check out our latest analysis for China Merchants Bank

How Quickly Is China Merchants Bank Increasing Earnings Per Share?

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) outcomes. So it makes sense that experienced investors pay close attention to company EPS when undertaking investment research. Over the last three years, China Merchants Bank has grown EPS by 12% per year. That growth rate is fairly good, assuming the company can keep it up.

Top-line growth is a great indicator that growth is sustainable, and combined with a high earnings before interest and taxation (EBIT) margin, it's a great way for a company to maintain a competitive advantage in the market. It's noted that China Merchants Bank's revenue from operations was lower than its revenue in the last twelve months, so that could distort our analysis of its margins. China Merchants Bank reported flat revenue and EBIT margins over the last year. That's not a major concern but nor does it point to the long term growth we like to see.

You can take a look at the company's revenue and earnings growth trend, in the chart below. For finer detail, click on the image.

In investing, as in life, the future matters more than the past. So why not check out this free interactive visualization of China Merchants Bank's forecast profits?

Are China Merchants Bank Insiders Aligned With All Shareholders?

It's said that there's no smoke without fire. For investors, insider buying is often the smoke that indicates which stocks could set the market alight. Because often, 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.

Any way you look at it China Merchants Bank shareholders can gain quiet confidence from the fact that insiders shelled out CN¥3.9m to buy stock, over the last year. And when you consider that there was no insider selling, you can understand why shareholders might believe that there are brighter days ahead. It is also worth noting that it was company insider Cao Jian who made the biggest single purchase, worth CN¥942k, paying CN¥30.00 per share.

The good news, alongside the insider buying, for China Merchants Bank bulls is that insiders (collectively) have a meaningful investment in the stock. To be specific, they have CN¥155m worth of shares. That's a lot of money, and no small incentive to work hard. Despite being just 0.02% of the company, the value of that investment is enough to show insiders have plenty riding on the venture.

Is China Merchants Bank Worth Keeping An Eye On?

One important encouraging feature of China Merchants Bank is that it is growing profits. Better yet, insiders are significant shareholders, and have been buying more shares. That makes the company a prime candidate for your watchlist - and arguably a research priority. While we've looked at the quality of the earnings, we haven't yet done any work to value the stock. So if you like to buy cheap, you may want to check if China Merchants Bank is trading on a high P/E or a low P/E, relative to its industry.

The good news is that China Merchants Bank is not the only stock with insider buying. Here's a list of small cap, undervalued companies in CN 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. 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.