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 Peter Lynch said in One Up On Wall Street, 'Long shots almost never pay off.'
In the age of tech-stock blue-sky investing, my choice may seem old fashioned; I still prefer profitable companies like FirstFarms (CPH:FFARMS). While profit is not necessarily a social good, it's easy to admire a business that can consistently produce it. Loss-making companies are always racing against time to reach financial sustainability, but time is often a friend of the profitable company, especially if it is growing.
Check out our latest analysis for FirstFarms
How Fast Is FirstFarms Growing Its Earnings Per Share?
In the last three years FirstFarms'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. As a result, I'll zoom in on growth over the last year, instead. Like the last firework on New Year's Eve accelerating into the sky, FirstFarms's EPS shot from ø1.32 to ø3.55, over the last year. You don't see 169% year-on-year growth like that, very often. That could be a sign that the business has reached a true inflection point.
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. The good news is that FirstFarms is growing revenues, and EBIT margins improved by 2.5 percentage points to 14%, over the last year. Ticking those two boxes is a good sign of growth, in my book.
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.
Since FirstFarms is no giant, with a market capitalization of ø344m, so you should definitely check its cash and debt before getting too excited about its prospects.
Are FirstFarms Insiders Aligned With All Shareholders?
It makes me feel more secure owning shares in a company if insiders also own shares, thusly more closely aligning our interests. So it is good to see that FirstFarms insiders have a significant amount of capital invested in the stock. To be specific, they have ø118m worth of shares. That shows significant buy-in, and may indicate conviction in the business strategy. That amounts to 34% of the company, demonstrating a degree of high-level alignment with shareholders.
Should You Add FirstFarms To Your Watchlist?
FirstFarms's earnings per share have taken off like a rocket aimed right at the moon. That EPS growth certainly has my attention, and the large insider ownership only serves to further stoke my interest. The hope is, of course, that the strong growth marks a fundamental improvement in the business economics. So to my mind FirstFarms is worth putting on your watchlist; after all, shareholders do well when the market underestimates fast growing companies. It's still necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with FirstFarms (at least 1 which shouldn't be ignored) , and understanding these should be part of your investment process.
You can invest in any company you want. But if you prefer to focus on stocks that have demonstrated insider buying, here is a list of companies 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.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
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