Here's Why We Think Chengdu Kanghong Pharmaceutical Group (SZSE:002773) Is Well Worth Watching

The excitement of investing in a company that can reverse its fortunes is a big draw for some speculators, so even companies that have no revenue, no profit, and a record of falling short, can manage to find investors. 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.

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 Chengdu Kanghong Pharmaceutical Group (SZSE:002773). 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 Chengdu Kanghong Pharmaceutical Group

Chengdu Kanghong Pharmaceutical Group's Improving Profits

Chengdu Kanghong Pharmaceutical Group has undergone a massive growth in earnings per share over the last three years. So much so that this three year growth rate wouldn't be a fair assessment of the company's future. So it would be better to isolate the growth rate over the last year for our analysis. Chengdu Kanghong Pharmaceutical Group's EPS shot up from CN¥0.96 to CN¥1.24; a result that's bound to keep shareholders happy. That's a impressive gain of 29%.

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. The good news is that Chengdu Kanghong Pharmaceutical Group is growing revenues, and EBIT margins improved by 3.7 percentage points to 29%, over the last year. That's great to see, on both counts.

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.

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

Are Chengdu Kanghong Pharmaceutical Group Insiders Aligned With All Shareholders?

Seeing insiders owning a large portion of the shares on issue is often a good sign. Their incentives will be aligned with the investors and there's less of a probability in a sudden sell-off that would impact the share price. So we're pleased to report that Chengdu Kanghong Pharmaceutical Group insiders own a meaningful share of the business. In fact, they own 39% of the shares, making insiders a very influential shareholder group. Those who are comforted by solid insider ownership like this should be happy, as it implies that those running the business are genuinely motivated to create shareholder value. At the current share price, that insider holding is worth a staggering CN¥7.8b. That means they have plenty of their own capital riding on the performance of the business!

Should You Add Chengdu Kanghong Pharmaceutical Group To Your Watchlist?

If you believe that share price follows earnings per share you should definitely be delving further into Chengdu Kanghong Pharmaceutical Group's strong EPS growth. Further, the high level of insider ownership is impressive and suggests that the management appreciates the EPS growth and has faith in Chengdu Kanghong Pharmaceutical Group's continuing strength. The growth and insider confidence is looked upon well and so it's worthwhile to investigate further with a view to discern the stock's true value. What about risks? Every company has them, and we've spotted 1 warning sign for Chengdu Kanghong Pharmaceutical Group you should know about.

Although Chengdu Kanghong Pharmaceutical Group certainly looks good, it may appeal to more investors if insiders were buying up shares. If you like to see companies with more skin in the game, then check out this handpicked selection of Chinese companies that not only boast of strong growth but have strong insider backing.

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

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

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