Here's Why I Think Gear4music (Holdings) (LON:G4M) Is An Interesting Stock

Published
May 07, 2022
AIM:G4M
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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 the reality is that when a company loses money each year, for long enough, its investors will usually take their share of those losses.

So if you're like me, you might be more interested in profitable, growing companies, like Gear4music (Holdings) (LON:G4M). Now, I'm not saying that the stock is necessarily undervalued today; but I can't shake an appreciation for the profitability of the business itself. Conversely, a loss-making company is yet to prove itself with profit, and eventually the sweet milk of external capital may run sour.

See our latest analysis for Gear4music (Holdings)

How Fast Is Gear4music (Holdings) Growing Its Earnings Per Share?

In the last three years Gear4music (Holdings)'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. It's good to see that Gear4music (Holdings)'s EPS have grown from UK£0.37 to UK£0.42 over twelve months. That's a 14% gain; respectable growth in the broader scheme of things.

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. While we note Gear4music (Holdings)'s EBIT margins were flat over the last year, revenue grew by a solid 7.6% to UK£152m. That's a real positive.

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.

earnings-and-revenue-history
AIM:G4M Earnings and Revenue History May 7th 2022

Of course the knack is to find stocks that have their best days in the future, not in the past. You could base your opinion on past performance, of course, but you may also want to check this interactive graph of professional analyst EPS forecasts for Gear4music (Holdings).

Are Gear4music (Holdings) 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 Gear4music (Holdings) insiders have a significant amount of capital invested in the stock. Indeed, they hold UK£10m worth of its stock. That's a lot of money, and no small incentive to work hard. Those holdings account for over 24% of the company; visible skin in the game.

It's good to see that insiders are invested in the company, but are remuneration levels reasonable? A brief analysis of the CEO compensation suggests they are. I discovered that the median total compensation for the CEOs of companies like Gear4music (Holdings) with market caps under UK£162m is about UK£254k.

The Gear4music (Holdings) CEO received UK£228k in compensation for the year ending . That comes in below the average for similar sized companies, and seems pretty reasonable to me. While the level of CEO compensation isn't a huge factor in my view of the company, modest remuneration is a positive, because it suggests that the board keeps shareholder interests in mind. It can also be a sign of a culture of integrity, in a broader sense.

Does Gear4music (Holdings) Deserve A Spot On Your Watchlist?

One positive for Gear4music (Holdings) is that it is growing EPS. That's nice to see. Earnings growth might be the main game for Gear4music (Holdings), but the fun does not stop there. With a meaningful level of insider ownership, and reasonable CEO pay, a reasonable mind might conclude that this is one stock worth watching. However, before you get too excited we've discovered 4 warning signs for Gear4music (Holdings) (2 can't be ignored!) that you should be aware of.

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.

Valuation is complex, but we're helping make it simple.

Find out whether Gear4music (Holdings) is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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