Stock Analysis

China Shengmu Organic Milk (HKG:1432) Ticks All The Boxes When It Comes To Earnings Growth

SEHK:1432
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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. While a well funded company may sustain losses for years, it will need to generate a profit eventually, or else investors will move on and the company will wither away.

Despite being in the age of tech-stock blue-sky investing, many investors still adopt a more traditional strategy; buying shares in profitable companies like China Shengmu Organic Milk (HKG:1432). Even if this company is fairly valued by the market, investors would agree that generating consistent profits will continue to provide China Shengmu Organic Milk with the means to add long-term value to shareholders.

Check out our latest analysis for China Shengmu Organic Milk

How Fast Is China Shengmu Organic Milk Growing Its Earnings Per Share?

In the last three years China Shengmu Organic Milk's earnings per share took off; so much so that it's a bit disingenuous to use these figures to try and deduce long term estimates. So it would be better to isolate the growth rate over the last year for our analysis. In previous twelve months, China Shengmu Organic Milk's EPS has risen from CN¥0.053 to CN¥0.056. That's a modest gain of 5.3%.

Top-line growth is a great indicator that growth is sustainable, and combined with a high earnings before interest and taxation (EBIT) margin, it's a great way for a company to maintain a competitive advantage in the market. While China Shengmu Organic Milk did well to grow revenue over the last year, EBIT margins were dampened at the same time. If EBIT margins are able to stay balanced and this revenue growth continues, then we should see brighter days ahead.

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.

earnings-and-revenue-history
SEHK:1432 Earnings and Revenue History July 18th 2022

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 China Shengmu Organic Milk's balance sheet strength, before getting too excited.

Are China Shengmu Organic Milk Insiders Aligned With All Shareholders?

It's a necessity that company leaders act in the best interest of shareholders and so insider investment always comes as a reassurance to the market. Shareholders will be pleased by the fact that insiders own China Shengmu Organic Milk shares worth a considerable sum. Holding CN¥763m worth of stock in the company is no laughing matter and insiders will be committed in delivering the best outcomes for shareholders. At 20% of the company, the co-investment by insiders fosters confidence that management will make long-term focussed decisions.

It means a lot to see insiders invested in the business, but shareholders may be wondering if remuneration policies are in their best interest. Well, based on the CEO pay, you'd argue that they are indeed. For companies with market capitalisations between CN¥1.4b and CN¥5.4b, like China Shengmu Organic Milk, the median CEO pay is around CN¥2.9m.

The China Shengmu Organic Milk CEO received CN¥1.6m in compensation for the year ending December 2021. That is actually below the median for CEO's of similarly 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 good governance, more generally.

Does China Shengmu Organic Milk Deserve A Spot On Your Watchlist?

As previously touched on, China Shengmu Organic Milk is a growing business, which is encouraging. Earnings growth might be the main attraction for China Shengmu Organic Milk, but the fun does not stop there. With a meaningful level of insider ownership, and reasonable CEO pay, a reasonable mind might conclude that this is one stock worth watching. Even so, be aware that China Shengmu Organic Milk is showing 1 warning sign in our investment analysis , you should know about...

There's always the possibility of doing well buying stocks that are not growing earnings and do not have insiders buying shares. But for those who consider these important metrics, we encourage you 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.

Valuation is complex, but we're helping make it simple.

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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.