We Ran A Stock Scan For Earnings Growth And Litigation Capital Management (LON:LIT) Passed With Ease

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. But as Peter Lynch said in One Up On Wall Street, 'Long shots almost never pay off.' Loss making companies can act like a sponge for capital - so investors should be cautious that they're not throwing good money after bad.

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 Litigation Capital Management (LON:LIT). 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 Litigation Capital Management

Litigation Capital Management's Improving Profits

Strong earnings per share (EPS) results are an indicator of a company achieving solid profits, which investors look upon favourably and so the share price tends to reflect great EPS performance. Which is why EPS growth is looked upon so favourably. It is awe-striking that Litigation Capital Management's EPS went from AU$0.063 to AU$0.26 in just one year. Even though that growth rate may not be repeated, that looks like a breakout improvement. This could point to the business hitting a point of inflection.

Top-line growth is a great indicator that growth is sustainable, and combined with a high earnings before interest and taxation (EBIT) margin, it's a great way for a company to maintain a competitive advantage in the market. Not all of Litigation Capital Management's revenue this year is revenue from operations, so keep in mind the revenue and margin numbers used in this article might not be the best representation of the underlying business. Litigation Capital Management shareholders can take confidence from the fact that EBIT margins are up from 39% to 92%, and revenue is growing. Both of which are great metrics to check off for potential growth.

You can take a look at the company's revenue and earnings growth trend, in the chart below. To see the actual numbers, click on the chart.

Since Litigation Capital Management is no giant, with a market capitalisation of UK£127m, you should definitely check its cash and debt before getting too excited about its prospects.

Are Litigation Capital Management Insiders Aligned With All Shareholders?

Insider interest in a company always sparks a bit of intrigue and many investors are on the lookout for companies where insiders are putting their money where their mouth is. That's because insider buying often indicates that those closest to the company have confidence that the share price will perform well. However, small purchases are not always indicative of conviction, and insiders don't always get it right.

It's good to see Litigation Capital Management insiders walking the walk, by spending AU$372k on shares in just twelve months. When you contrast that with the complete lack of sales, it's easy for shareholders to be brimming with joyful expectancy. It is also worth noting that it was Independent Non-Executive Chairman Jonathan Moulds who made the biggest single purchase, worth UK£261k, paying UK£0.70 per share.

Along with the insider buying, another encouraging sign for Litigation Capital Management is that insiders, as a group, have a considerable shareholding. Indeed, they hold AU$19m worth of its stock. This considerable investment should help drive long-term value in the business. As a percentage, this totals to 15% of the shares on issue for the business, an appreciable amount considering the market cap.

Is Litigation Capital Management Worth Keeping An Eye On?

Litigation Capital Management's earnings per share growth have been climbing higher at an appreciable rate. What's more, insiders own a significant stake in the company and have been buying more shares. These factors seem to indicate the company's potential and that it has reached an inflection point. We'd suggest Litigation Capital Management belongs near the top of your watchlist. You should always think about risks though. Case in point, we've spotted 1 warning sign for Litigation Capital Management you should be aware of.

There are plenty of other companies that have insiders buying up shares. So if you like the sound of Litigation Capital Management, you'll probably love this free list of growing companies that insiders are buying.

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.