We Ran A Stock Scan For Earnings Growth And Eleco (LON:ELCO) Passed With Ease

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 as Peter Lynch said in One Up On Wall Street, 'Long shots almost never pay off.' Loss-making companies are always racing against time to reach financial sustainability, so investors in these companies may be taking on more risk than they should.

So if this idea of high risk and high reward doesn't suit, you might be more interested in profitable, growing companies, like Eleco (LON:ELCO). While this doesn't necessarily speak to whether it's undervalued, the profitability of the business is enough to warrant some appreciation - especially if its growing.

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How Fast Is Eleco Growing?

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. That makes EPS growth an attractive quality for any company. It certainly is nice to see that Eleco has managed to grow EPS by 17% per year over 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 Eleco achieved similar EBIT margins to last year, revenue grew by a solid 12% to UK£34m. That's a real positive.

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.

See our latest analysis for Eleco

Fortunately, we've got access to analyst forecasts of Eleco's future profits. You can do your own forecasts without looking, or you can take a peek at what the professionals are predicting.

Are Eleco 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.

We note that Eleco insiders spent UK£85k on stock, over the last year; in contrast, we didn't see any selling. That's nice to see, because it suggests insiders are optimistic. It is also worth noting that it was Independent Non-Executive Chairman Mark Castle who made the biggest single purchase, worth UK£75k, paying UK£1.62 per share.

The good news, alongside the insider buying, for Eleco bulls is that insiders (collectively) have a meaningful investment in the stock. Indeed, they hold UK£27m worth of its stock. This considerable investment should help drive long-term value in the business. As a percentage, this totals to 23% of the shares on issue for the business, an appreciable amount considering the market cap.

Is Eleco Worth Keeping An Eye On?

If you believe that share price follows earnings per share you should definitely be delving further into Eleco's strong EPS growth. On top of that, insiders own a significant stake in the company and have been buying more shares. Astute investors will want to keep this stock on watch. Now, you could try to make up your mind on Eleco 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, Eleco 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.