Should You Be Adding Paradise Entertainment (HKG:1180) To Your Watchlist Today?

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 currently 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.' 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 Paradise Entertainment (HKG:1180). While profit isn't the sole metric that should be considered when investing, it's worth recognising businesses that can consistently produce it.

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How Fast Is Paradise Entertainment Growing Its Earnings Per Share?

In business, profits are a key measure of success; and share prices tend to reflect earnings per share (EPS) performance. Which is why EPS growth is looked upon so favourably. It is awe-striking that Paradise Entertainment's EPS went from HK$0.063 to HK$0.34 in just one year. Even though that growth rate may not be repeated, that looks like a breakout improvement. But the key is discerning whether something profound has changed, or if this is a just a one-off boost.

It's often helpful to take a look at earnings before interest and tax (EBIT) margins, as well as revenue growth, to get another take on the quality of the company's growth. The good news is that Paradise Entertainment is growing revenues, and EBIT margins improved by 24.4 percentage points to 34%, over the last year. Ticking those two boxes is a good sign of growth, in our book.

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 Paradise Entertainment

Paradise Entertainment isn't a huge company, given its market capitalisation of HK$905m. That makes it extra important to check on its balance sheet strength.

Are Paradise Entertainment Insiders Aligned With All Shareholders?

Insider interest in a company always sparks a bit of intrigue and many investors are on the lookout for companies where insiders are putting their money where their mouth is. 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 haven't seen any insiders selling Paradise Entertainment shares, in the last year. Add in the fact that Jay Chun, the MD & Executive Chairman of the company, paid HK$318k for shares at around HK$0.89 each. Decent buying like this could be a sign for shareholders here; management sees the company as undervalued.

And the insider buying isn't the only sign of alignment between shareholders and the board, since Paradise Entertainment insiders own more than a third of the company. In fact, they own 62% of the company, so they will share in the same delights and challenges experienced by the ordinary shareholders. This should be seen as a good thing, as it means insiders have a personal interest in delivering the best outcomes for shareholders. To give you an idea, the value of insiders' holdings in the business are valued at HK$565m at the current share price. So there's plenty there to keep them focused!

Should You Add Paradise Entertainment To Your Watchlist?

Paradise Entertainment's earnings have taken off in quite an impressive fashion. The cherry on top is that insiders own a bunch of shares, and one has been buying more. This quick rundown suggests that the business may be of good quality, and also at an inflection point, so maybe Paradise Entertainment deserves timely attention. You should always think about risks though. Case in point, we've spotted 3 warning signs for Paradise Entertainment you should be aware of, and 2 of them make us uncomfortable.

Keen growth investors love to see insider activity. Thankfully, Paradise Entertainment isn't the only one. You can see a a curated list of Hong Kong 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.