Do Smiths Group's (LON:SMIN) Earnings Warrant Your Attention?

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 currently lacks a track record of revenue and profit. Unfortunately, these high risk investments often have little probability of ever paying off, and many investors pay a price to learn their lesson. 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 Smiths Group (LON:SMIN). While profit isn't the sole metric that should be considered when investing, it's worth recognising businesses that can consistently produce it.

View our latest analysis for Smiths Group

How Fast Is Smiths Group Growing?

Generally, companies experiencing growth in earnings per share (EPS) should see similar trends in share price. That makes EPS growth an attractive quality for any company. Smiths Group's shareholders have have plenty to be happy about as their annual EPS growth for the last 3 years was 58%. That sort of growth rarely ever lasts long, but it is well worth paying attention to when it happens.

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 Smiths Group did well to grow revenue over the last year, EBIT margins were dampened at the same time. So if EBIT margins can stabilize, this top-line growth should pay off for shareholders.

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.

The trick, as an investor, is to find companies that are going to perform well in the future, not just in the past. While crystal balls don't exist, you can check our visualization of consensus analyst forecasts for Smiths Group's future EPS 100% free.

Are Smiths Group Insiders Aligned With All Shareholders?

Investors are always searching for a vote of confidence in the companies they hold and insider buying is one of the key indicators for optimism on the market. Because often, the purchase of stock is a sign that the buyer views it as undervalued. However, insiders are sometimes wrong, and we don't know the exact thinking behind their acquisitions.

Not only did Smiths Group insiders refrain from selling stock during the year, but they also spent UK£51k buying it. That's nice to see, because it suggests insiders are optimistic.

It's commendable to see that insiders have been buying shares in Smiths Group, but there is more evidence of shareholder friendly management. Namely, Smiths Group has a very reasonable level of CEO pay. Our analysis has discovered that the median total compensation for the CEOs of companies like Smiths Group with market caps between UK£3.3b and UK£9.9b is about UK£2.5m.

Smiths Group offered total compensation worth UK£1.8m to its CEO in the year to July 2022. That seems pretty reasonable, especially given it's below the median for similar sized companies. CEO compensation is hardly the most important aspect of a company to consider, but when it's reasonable, that gives a little more confidence that leadership are looking out for shareholder interests. Generally, arguments can be made that reasonable pay levels attest to good decision-making.

Should You Add Smiths Group To Your Watchlist?

Smiths Group's earnings per share growth have been climbing higher at an appreciable rate. Better yet, we can observe insider buying and the chief executive pay looks reasonable. The strong EPS growth suggests Smiths Group may be at an inflection point. If these have piqued your interest, then this stock surely warrants a spot on your watchlist. You should always think about risks though. Case in point, we've spotted 1 warning sign for Smiths Group you should be aware of.

Keen growth investors love to see insider buying. Thankfully, Smiths Group isn't the only one. You can see a 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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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.