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.
In contrast to all that, I prefer to spend time on companies like Zhengzhou Coal Mining Machinery Group (HKG:564), which has not only revenues, but also profits. 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. In comparison, loss making companies act like a sponge for capital – but unlike such a sponge they do not always produce something when squeezed.
Zhengzhou Coal Mining Machinery Group’s Improving Profits
Over the last three years, Zhengzhou Coal Mining Machinery Group has grown earnings per share (EPS) like bamboo after rain; fast, and from a low base. So I don’t think the percent growth rate is particularly meaningful. As a result, I’ll zoom in on growth over the last year, instead. Like the last firework on New Year’s Eve accelerating into the sky, Zhengzhou Coal Mining Machinery Group’s EPS shot from CN¥0.17 to CN¥0.48, over the last year. Year on year growth of 187% is certainly a sight to behold.
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. While we note Zhengzhou Coal Mining Machinery Group’s EBIT margins were flat over the last year, revenue grew by a solid 245% to CN¥26b. That’s progress.
The chart below shows how the company’s bottom and top lines have progressed over time. To see the actual numbers, click on the chart.
While we live in the present moment at all times, there’s no doubt in my mind that the future matters more than the past. So why not check this interactive chart depicting future EPS estimates, for Zhengzhou Coal Mining Machinery Group?
Are Zhengzhou Coal Mining Machinery Group Insiders Aligned With All Shareholders?
It makes me feel more secure owning shares in a company, if insiders also own shares, thusly more closely aligning our interests. So it is good to see that Zhengzhou Coal Mining Machinery Group insiders have a significant amount of capital invested in the stock. To be specific, they have CN¥325m worth of shares. That shows significant buy-in, and may indicate conviction in the business strategy. Even though that’s only about 2.6% of the company, it’s enough money to indicate alignment between the leaders of the business and ordinary shareholders.
Should You Add Zhengzhou Coal Mining Machinery Group To Your Watchlist?
Zhengzhou Coal Mining Machinery Group’s earnings have taken off like any random crypto-currency did, back in 2017. That sort of growth is nothing short of eye-catching, and the large investment held by insiders certainly brightens my view of the company. The hope is, of course, that the strong growth marks a fundamental improvement in the business economics. So yes, on this short analysis I do think it’s worth considering Zhengzhou Coal Mining Machinery Group for a spot on your watchlist. Of course, just because Zhengzhou Coal Mining Machinery Group is growing does not mean it is undervalued. If you’re wondering about the valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
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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