Here's Why We Think Diploma (LON:DPLM) Is Well Worth Watching

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 the reality is that when a company loses money each year, for long enough, its investors will usually take their share of those losses. Loss making companies can act like a sponge for capital - so investors should be cautious that they're not throwing good money after bad.

In contrast to all that, many investors prefer to focus on companies like Diploma (LON:DPLM), which has not only revenues, but also profits. While profit isn't the sole metric that should be considered when investing, it's worth recognising businesses that can consistently produce it.

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How Quickly Is Diploma Increasing Earnings Per Share?

If you believe that markets are even vaguely efficient, then over the long term you'd expect a company's share price to follow its earnings per share (EPS) outcomes. Therefore, there are plenty of investors who like to buy shares in companies that are growing EPS. Impressively, Diploma has grown EPS by 28% per year, compound, in the last three years. If the company can sustain that sort of growth, we'd expect shareholders to come away satisfied.

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. While we note Diploma achieved similar EBIT margins to last year, revenue grew by a solid 16% to UK£1.5b. That's a real positive.

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.

Check out our latest analysis for Diploma

In investing, as in life, the future matters more than the past. So why not check out this free interactive visualization of Diploma's forecast profits?

Are Diploma Insiders Aligned With All Shareholders?

It's said that there's no smoke without fire. For investors, insider buying is often the smoke that indicates which stocks could set the market alight. Because often, the purchase of stock is a sign that the buyer views it as undervalued. Of course, we can never be sure what insiders are thinking, we can only judge their actions.

Any way you look at it Diploma shareholders can gain quiet confidence from the fact that insiders shelled out UK£282k to buy stock, over the last year. This, combined with the lack of sales from insiders, should be a great signal for shareholders in what's to come. We also note that it was the company insider, Christopher Davies, who made the biggest single acquisition, paying UK£168k for shares at about UK£42.80 each.

The good news, alongside the insider buying, for Diploma bulls is that insiders (collectively) have a meaningful investment in the stock. Indeed, they hold UK£11m worth of its stock. This considerable investment should help drive long-term value in the business. Despite being just 0.2% of the company, the value of that investment is enough to show insiders have plenty riding on the venture.

Does Diploma Deserve A Spot On Your Watchlist?

If you believe that share price follows earnings per share you should definitely be delving further into Diploma's strong EPS growth. Furthermore, company insiders have been adding to their significant stake in the company. These things considered, this is one stock worth watching. Now, you could try to make up your mind on Diploma by focusing on just these factors, or you could also consider how its price-to-earnings ratio compares to other companies in its industry.

Keen growth investors love to see insider activity. Thankfully, Diploma isn't the only one. You can see a a curated list of British companies which have exhibited consistent growth accompanied by high insider ownership.

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.