Should You Be Adding Tonghua Golden-Horse Pharmaceutical Industry CoLtd (SZSE:000766) To Your Watchlist Today?

Investors are often guided by the idea of discovering 'the next big thing', even if that means buying 'story stocks' without any 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. 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 Tonghua Golden-Horse Pharmaceutical Industry CoLtd (SZSE:000766). 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 Tonghua Golden-Horse Pharmaceutical Industry CoLtd

Tonghua Golden-Horse Pharmaceutical Industry CoLtd's Improving Profits

Over the last three years, Tonghua Golden-Horse Pharmaceutical Industry CoLtd has grown earnings per share (EPS) at as impressive rate from a relatively low point, resulting in a three year percentage growth rate that isn't particularly indicative of expected future performance. So it would be better to isolate the growth rate over the last year for our analysis. To the delight of shareholders, Tonghua Golden-Horse Pharmaceutical Industry CoLtd's EPS soared from CN¥0.03 to CN¥0.045, over the last year. That's a commendable gain of 52%.

It's often helpful to take a look at earnings before interest and tax (EBIT) margins, as well as revenue growth, to get another take on the quality of the company's growth. It seems Tonghua Golden-Horse Pharmaceutical Industry CoLtd is pretty stable, since revenue and EBIT margins are pretty flat year on year. While this doesn't ring alarm bells, it may not meet the expectations of growth-minded investors.

In the chart below, you can see how the company has grown earnings and revenue, over time. To see the actual numbers, click on the chart.

While profitability drives the upside, prudent investors always check the balance sheet, too.

Are Tonghua Golden-Horse Pharmaceutical Industry CoLtd Insiders Aligned With All Shareholders?

It's pleasing to see company leaders with putting their money on the line, so to speak, because it increases alignment of incentives between the people running the business, and its true owners. Shareholders will be pleased by the fact that insiders own Tonghua Golden-Horse Pharmaceutical Industry CoLtd shares worth a considerable sum. Notably, they have an enviable stake in the company, worth CN¥4.9b. That equates to 27% of the company, making insiders powerful and aligned with other shareholders. Very encouraging.

It's good to see that insiders are invested in the company, but are remuneration levels reasonable? Well, based on the CEO pay, you'd argue that they are indeed. For companies with market capitalisations between CN¥14b and CN¥46b, like Tonghua Golden-Horse Pharmaceutical Industry CoLtd, the median CEO pay is around CN¥1.5m.

Tonghua Golden-Horse Pharmaceutical Industry CoLtd offered total compensation worth CN¥960k to its CEO in the year to December 2022. That is actually below the median for CEO's of similarly sized companies. While the level of CEO compensation shouldn't be the biggest factor in how the company is viewed, 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 Tonghua Golden-Horse Pharmaceutical Industry CoLtd To Your Watchlist?

For growth investors, Tonghua Golden-Horse Pharmaceutical Industry CoLtd's raw rate of earnings growth is a beacon in the night. If you still have your doubts, remember too that company insiders have a considerable investment aligning themselves with the shareholders and CEO pay is quite modest compared to similarly sized companiess. Everyone has their own preferences when it comes to investing but it definitely makes Tonghua Golden-Horse Pharmaceutical Industry CoLtd look rather interesting indeed. Don't forget that there may still be risks. For instance, we've identified 1 warning sign for Tonghua Golden-Horse Pharmaceutical Industry CoLtd that you should be aware of.

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 Chinese companies which have demonstrated growth backed by recent insider purchases.

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.