Does L.K. Technology Holdings (HKG:558) Deserve A Spot On Your Watchlist?

Investors are often guided by the idea of discovering 'the next big thing', even if that means buying 'story stocks' without any revenue, let alone profit. 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. Loss making companies can act like a sponge for capital - so investors should be cautious that they're not throwing good money after bad.

If this kind of company isn't your style, you like companies that generate revenue, and even earn profits, then you may well be interested in L.K. Technology Holdings (HKG:558). 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.

View our latest analysis for L.K. Technology Holdings

How Fast Is L.K. Technology Holdings Growing?

The market is a voting machine in the short term, but a weighing machine in the long term, so you'd expect share price to follow earnings per share (EPS) outcomes eventually. That means EPS growth is considered a real positive by most successful long-term investors. It certainly is nice to see that L.K. Technology Holdings has managed to grow EPS by 34% per year over three years. As a general rule, we'd say that if a company can keep up that sort of growth, shareholders will be beaming.

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. The music to the ears of L.K. Technology Holdings shareholders is that EBIT margins have grown from 7.4% to 15% in the last 12 months and revenues are on an upwards trend as well. That's great to see, on both counts.

The chart below shows how the company's bottom and top lines have progressed over time. For finer detail, click on the image.

You don't drive with your eyes on the rear-view mirror, so you might be more interested in this free report showing analyst forecasts for L.K. Technology Holdings' future profits.

Are L.K. Technology Holdings Insiders Aligned With All Shareholders?

It's said that there's no smoke without fire. For investors, insider buying is often the smoke that indicates which stocks could set the market alight. This view is based on the possibility that stock purchases signal bullishness on behalf of the buyer. Of course, we can never be sure what insiders are thinking, we can only judge their actions.

One shining light for L.K. Technology Holdings is the serious outlay one insider has made to buy shares, in the last year. In other words, the Executive Chairperson, Siw Yin Chong, acquired HK$10m worth of shares over the previous 12 months at an average price of around HK$10.27. It doesn't get much better than that, in terms of large investments from insiders.

And the insider buying isn't the only sign of alignment between shareholders and the board, since L.K. Technology Holdings insiders own more than a third of the company. To be exact, company insiders hold 62% of the company, so their decisions have a significant impact on their investments. This makes it apparent they will be incentivised to plan for the long term - a positive for shareholders with a sit and hold strategy. This insider holding amounts to This is an incredible endorsement from them.

Shareholders have more to smile about than just insiders adding more shares to their already sizeable holdings. The cherry on top is that the CEO, Zhuo Ming Liu is paid comparatively modestly to CEOs at similar sized companies. For companies with market capitalisations between HK$16b and HK$50b, like L.K. Technology Holdings, the median CEO pay is around HK$2.8m.

L.K. Technology Holdings' CEO took home a total compensation package worth HK$1.4m in the year leading up to March 2021. That seems pretty reasonable, especially given it's below the median for similar sized companies. CEO remuneration levels are not the most important metric for investors, but when the pay is modest, that does support enhanced alignment between the CEO and the ordinary shareholders. It can also be a sign of a culture of integrity, in a broader sense.

Is L.K. Technology Holdings Worth Keeping An Eye On?

If you believe that share price follows earnings per share you should definitely be delving further into L.K. Technology Holdings' strong EPS growth. Better still, insiders own a large chunk of the company and one has even been buying more shares. These things considered, this is one stock worth watching. Don't forget that there may still be risks. For instance, we've identified 1 warning sign for L.K. Technology Holdings that you should be aware of.

There are plenty of other companies that have insiders buying up shares. So if you like the sound of L.K. Technology Holdings, 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.