If EPS Growth Is Important To You, Liuzhou Chemical Industry (SHSE:600423) Presents An Opportunity

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.' While a well funded company may sustain losses for years, it will need to generate a profit eventually, or else investors will move on and the company will wither away.

So if this idea of high risk and high reward doesn't suit, you might be more interested in profitable, growing companies, like Liuzhou Chemical Industry (SHSE:600423). While this doesn't necessarily speak to whether it's undervalued, the profitability of the business is enough to warrant some appreciation - especially if its growing.

View our latest analysis for Liuzhou Chemical Industry

How Fast Is Liuzhou Chemical Industry Growing Its Earnings Per Share?

In the last three years Liuzhou Chemical Industry's earnings per share took off; so much so that it's a bit disingenuous to use these figures to try and deduce long term estimates. Thus, it makes sense to focus on more recent growth rates, instead. To the delight of shareholders, Liuzhou Chemical Industry's EPS soared from CN¥0.016 to CN¥0.024, over the last year. That's a commendable gain of 52%.

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. It's noted that, last year, Liuzhou Chemical Industry's revenue from operations was lower than its revenue, so that could distort our analysis of its margins. Unfortunately, revenue is down and so are margins. This is less than stellar for the company.

The chart below shows how the company's bottom and top lines have progressed over time. For finer detail, click on the image.

While it's always good to see growing profits, you should always remember that a weak balance sheet could come back to bite. So check Liuzhou Chemical Industry's balance sheet strength, before getting too excited.

Are Liuzhou Chemical Industry Insiders Aligned With All Shareholders?

As a general rule, it's worth considering how much the CEO is paid, since unreasonably high rates could be considered against the interests of shareholders. Our analysis has discovered that the median total compensation for the CEOs of companies like Liuzhou Chemical Industry with market caps between CN¥1.4b and CN¥5.8b is about CN¥839k.

Liuzhou Chemical Industry's CEO only received compensation totalling CN¥387k in the year to December 2022. You could consider this pay as somewhat symbolic, which suggests the CEO does not need a lot of compensation to stay motivated. CEO compensation is hardly the most important aspect of a company to consider, but when it's reasonable, that gives a little more confidence that leadership are looking out for shareholder interests. Generally, arguments can be made that reasonable pay levels attest to good decision-making.

Is Liuzhou Chemical Industry Worth Keeping An Eye On?

You can't deny that Liuzhou Chemical Industry has grown its earnings per share at a very impressive rate. That's attractive. With swiftly growing earnings, the best days may still be to come, and the modest CEO pay suggests the company is careful with cash. So this stock is well worth an addition to your watchlist as it has the potential to provide great value to shareholders. It's still necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Liuzhou Chemical Industry , and understanding them should be part of your investment process.

Although Liuzhou Chemical Industry certainly looks good, it may appeal to more investors if insiders were buying up shares. If you like to see companies with insider buying, then check out this handpicked selection of Chinese companies that not only boast of strong growth but have also seen recent insider buying..

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.