Should You Be Adding ABC arbitrage (EPA:ABCA) To Your Watchlist Today?

By
Simply Wall St
Published
June 03, 2021
ENXTPA:ABCA
Source: Shutterstock

It's only natural that many investors, especially those who are new to the game, prefer to buy shares in 'sexy' stocks with a good story, even if those businesses lose money. But as Warren Buffett has mused, 'If you've been playing poker for half an hour and you still don't know who the patsy is, you're the patsy.' When they buy such story stocks, investors are all too often the patsy.

In the age of tech-stock blue-sky investing, my choice may seem old fashioned; I still prefer profitable companies like ABC arbitrage (EPA:ABCA). Even if the shares are fully valued today, most capitalists would recognize its profits as the demonstration of steady value generation. 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.

View our latest analysis for ABC arbitrage

How Quickly Is ABC arbitrage Increasing Earnings Per Share?

As one of my mentors once told me, share price follows earnings per share (EPS). That means EPS growth is considered a real positive by most successful long-term investors. It certainly is nice to see that ABC arbitrage has managed to grow EPS by 24% per year over three years. If the company can sustain that sort of growth, we'd expect shareholders to come away winners.

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. I note that ABC arbitrage's revenue from operations was lower than its revenue in the last twelve months, so that could distort my analysis of its margins. ABC arbitrage shareholders can take confidence from the fact that EBIT margins are up from 49% to 51%, and revenue is growing. 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. Click on the chart to see the exact numbers.

earnings-and-revenue-history
ENXTPA:ABCA Earnings and Revenue History June 4th 2021

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 ABC arbitrage's balance sheet strength, before getting too excited.

Are ABC arbitrage Insiders Aligned With All Shareholders?

I like company leaders to have some skin in the game, so to speak, because it increases alignment of incentives between the people running the business, and its true owners. So it is good to see that ABC arbitrage insiders have a significant amount of capital invested in the stock. Given insiders own a small fortune of shares, currently valued at €41m, they have plenty of motivation to push the business to succeed. That holding amounts to 9.9% of the stock on issue, thus making insiders influential, and aligned, owners of the business.

Is ABC arbitrage Worth Keeping An Eye On?

For growth investors like me, ABC arbitrage's raw rate of earnings growth is a beacon in the night. Further, the high level of insider ownership impresses me, and suggests that I'm not the only one who appreciates the EPS growth. So this is very likely the kind of business that I like to spend time researching, with a view to discerning its true value. Even so, be aware that ABC arbitrage is showing 1 warning sign in our investment analysis , you should know about...

Of course, you can do well (sometimes) buying stocks that are not growing earnings and do not have insiders buying shares. But as a growth investor I always like to check out companies that do have those features. You can access a free list of them here.

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

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