Does Zhengzhou Coal Mining Machinery Group (HKG:564) Deserve A Spot On Your Watchlist?

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 completely 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.'

In the age of tech-stock blue-sky investing, my choice may seem old fashioned; I still prefer profitable companies like Zhengzhou Coal Mining Machinery Group (HKG:564). While that doesn't make the shares worth buying at any price, you can't deny that successful capitalism requires profit, eventually. While a well funded company may sustain losses for years, unless its owners have an endless appetite for subsidizing the customer, it will need to generate a profit eventually, or else breathe its last breath.

Check out our latest analysis for Zhengzhou Coal Mining Machinery Group

Zhengzhou Coal Mining Machinery Group's Improving Profits

In the last three years Zhengzhou Coal Mining Machinery Group'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. Thus, it makes sense to focus on more recent growth rates, instead. It's good to see that Zhengzhou Coal Mining Machinery Group's EPS have grown from CN¥0.60 to CN¥0.72 over twelve months. I doubt many would complain about that 19% gain.

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). Not all of Zhengzhou Coal Mining Machinery Group's revenue this year is revenue from operations, so keep in mind the revenue and margin numbers I've used might not be the best representation of the underlying business. The good news is that Zhengzhou Coal Mining Machinery Group is growing revenues, and EBIT margins improved by 4.6 percentage points to 11%, over the last year. Ticking those two boxes is a good sign of growth, in my book.

You can take a look at the company's revenue and earnings growth trend, in the chart below. Click on the chart to see the exact numbers.

While it's always good to see growing profits, you should always remember that a weak balance sheet could come back to bite. So check Zhengzhou Coal Mining Machinery Group's balance sheet strength, before getting too excited.

Are Zhengzhou Coal Mining Machinery Group 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 Zhengzhou Coal Mining Machinery Group insiders have a significant amount of capital invested in the stock. Indeed, they hold CN¥385m worth of its stock. That shows significant buy-in, and may indicate conviction in the business strategy. Even though that's only about 1.6% of the company, it's enough money to indicate alignment between the leaders of the business and ordinary shareholders.

Does Zhengzhou Coal Mining Machinery Group Deserve A Spot On Your Watchlist?

One positive for Zhengzhou Coal Mining Machinery Group is that it is growing EPS. That's nice to see. Just as polish makes silverware pop, the high level of insider ownership enhances my enthusiasm for this growth. That combination appeals to me, for one. So yes, I do think the stock is worth keeping an eye on. However, before you get too excited we've discovered 4 warning signs for Zhengzhou Coal Mining Machinery Group 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.

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This article by Simply Wall St is general in nature. 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.
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