Here's Why I Think China Leon Inspection Holding (HKG:1586) Is An Interesting Stock

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 Warren Buffett has mused, 'If you've been playing poker for half an hour and you still don't know who the patsy is, you're the patsy.' When they buy such story stocks, investors are all too often the patsy.

In the age of tech-stock blue-sky investing, my choice may seem old fashioned; I still prefer profitable companies like China Leon Inspection Holding (HKG:1586). While that doesn't make the shares worth buying at any price, you can't deny that successful capitalism requires profit, eventually. Conversely, a loss-making company is yet to prove itself with profit, and eventually the sweet milk of external capital may run sour.

View our latest analysis for China Leon Inspection Holding

How Fast Is China Leon Inspection Holding Growing?

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. Over the last three years, China Leon Inspection Holding has grown EPS by 12% per year. 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). The good news is that China Leon Inspection Holding is growing revenues, and EBIT margins improved by 2.5 percentage points to 14%, over the last year. Ticking those two boxes is a good sign of growth, in my 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.

Since China Leon Inspection Holding is no giant, with a market capitalization of HK$591m, so you should definitely check its cash and debt before getting too excited about its prospects.

Are China Leon Inspection Holding 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. That's because insider buying often indicates that those closest to the company have confidence that the share price will perform well. However, small purchases are not always indicative of conviction, and insiders don't always get it right.

Any way you look at it China Leon Inspection Holding shareholders can gain quiet confidence from the fact that insiders shelled out CN¥3.5m to buy stock, over the last year. And when you consider that there was no insider selling, you can understand why shareholders might believe that lady luck will grace this business. Zooming in, we can see that the biggest insider purchase was by VP & Executive Director Yi Liu for HK$1.1m worth of shares, at about HK$1.02 per share.

And the insider buying isn't the only sign of alignment between shareholders and the board, since China Leon Inspection Holding insiders own more than a third of the company. Indeed, with a collective holding of 63%, company insiders are in control and have plenty of capital behind the venture. This makes me think they will be incentivised to plan for the long term - something I like to see. With that sort of holding, insiders have about CN¥371m riding on the stock, at current prices. That's nothing to sneeze at!

Is China Leon Inspection Holding Worth Keeping An Eye On?

One important encouraging feature of China Leon Inspection Holding is that it is growing profits. On top of that, we've seen insiders buying shares even though they already own plenty. To me, that all makes it well worth a spot on your watchlist, as well as continuing research. It is worth noting though that we have found 2 warning signs for China Leon Inspection Holding that you need to take into consideration.

As a growth investor I do like to see insider buying. But China Leon Inspection Holding isn't the only one. You can see a 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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