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.
If, on the other hand, you like companies that have revenue, and even earn profits, then you may well be interested in Solid State (LON:SOLI). 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. Loss-making companies are always racing against time to reach financial sustainability, but time is often a friend of the profitable company, especially if it is growing.
How Quickly Is Solid State 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). That means EPS growth is considered a real positive by most successful long-term investors. Solid State managed to grow EPS by 15% per year, over three years. That's a good rate of growth, if it can be sustained.
I like to see top-line growth as an indication that growth is sustainable, and I look for a high earnings before interest and taxation (EBIT) margin to point to a competitive moat (though some companies with low margins also have moats). While we note Solid State's EBIT margins were flat over the last year, revenue grew by a solid 8.5% to UK£73m. 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.
In investing, as in life, the future matters more than the past. So why not check out this free interactive visualization of Solid State's forecast profits?
Are Solid State Insiders Aligned With All Shareholders?
Like the kids in the streets standing up for their beliefs, insider share purchases give me reason to believe in a brighter future. Because oftentimes, the purchase of stock is a sign that the buyer views it as undervalued. However, small purchases are not always indicative of conviction, and insiders don't always get it right.
The good news for Solid State shareholders is that no insiders reported selling shares in the last year. With that in mind, it's heartening that Peter Magowan, the Senior Independent Non-Executive Director of the company, paid UK£36k for shares at around UK£9.06 each.
Along with the insider buying, another encouraging sign for Solid State is that insiders, as a group, have a considerable shareholding. To be specific, they have UK£22m worth of shares. That shows significant buy-in, and may indicate conviction in the business strategy. That amounts to 21% of the company, demonstrating a degree of high-level alignment with shareholders.
Does Solid State Deserve A Spot On Your Watchlist?
One positive for Solid State is that it is growing EPS. That's nice to see. Better yet, insiders are significant shareholders, and have been buying more shares. That makes the company a prime candidate for my watchlist - and arguably a research priority. Now, you could try to make up your mind on Solid State by focusing on just these factors, or you could also consider how its price-to-earnings ratio compares to other companies in its industry.
There are plenty of other companies that have insiders buying up shares. So if you like the sound of Solid State, 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.
Valuation is complex, but we're helping make it simple.
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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.
Solid State plc, together with its subsidiaries, designs and manufactures electronic equipment and supplies the value added electronic components and materials in the United Kingdom, rest of Europe, Asia, North America, and internationally.
Solid track record with excellent balance sheet and pays a dividend.