If You Like EPS Growth Then Check Out Zhongzhi Pharmaceutical Holdings (HKG:3737) Before It's Too Late

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 Zhongzhi Pharmaceutical Holdings (HKG:3737), 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. Loss-making companies are always racing against time to reach financial sustainability, but time is often a friend of the profitable company, especially if it is growing.

See our latest analysis for Zhongzhi Pharmaceutical Holdings

How Fast Is Zhongzhi Pharmaceutical Holdings Growing?

As one of my mentors once told me, share price follows earnings per share (EPS). That makes EPS growth an attractive quality for any company. Impressively, Zhongzhi Pharmaceutical Holdings has grown EPS by 26% per year, compound, in the last three years. If the company can sustain that sort of growth, we'd expect shareholders to come away winners.

Careful consideration of revenue growth and earnings before interest and taxation (EBIT) margins can help inform a view on the sustainability of the recent profit growth. Zhongzhi Pharmaceutical Holdings shareholders can take confidence from the fact that EBIT margins are up from 8.3% to 10%, and revenue is growing. That's great to see, on both counts.

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.

Zhongzhi Pharmaceutical Holdings isn't a huge company, given its market capitalization of HK$1.4b. That makes it extra important to check on its balance sheet strength.

Are Zhongzhi Pharmaceutical Holdings Insiders Aligned With All Shareholders?

Many consider high insider ownership to be a strong sign of alignment between the leaders of a company and the ordinary shareholders. So as you can imagine, the fact that Zhongzhi Pharmaceutical Holdings insiders own a significant number of shares certainly appeals to me. In fact, they own 62% of the company, so they will share in the same delights and challenges experienced by the ordinary shareholders. To me this is a good sign because it suggests they will be incentivised to build value for shareholders over the long term. In terms of absolute value, insiders have CN¥869m invested in the business, using the current share price. That's nothing to sneeze at!

It's good to see that insiders are invested in the company, but are remuneration levels reasonable? Well, based on the CEO pay, I'd say they are indeed. I discovered that the median total compensation for the CEOs of companies like Zhongzhi Pharmaceutical Holdings with market caps between CN¥655m and CN¥2.6b is about CN¥2.0m.

The Zhongzhi Pharmaceutical Holdings CEO received CN¥1.7m in compensation for the year ending . That comes in below the average for similar sized companies, and seems pretty reasonable to me. While the level of CEO compensation isn't a huge factor in my view of the company, modest remuneration is a positive, because it suggests that the board keeps shareholder interests in mind. It can also be a sign of good governance, more generally.

Is Zhongzhi Pharmaceutical Holdings Worth Keeping An Eye On?

For growth investors like me, Zhongzhi Pharmaceutical Holdings's raw rate of earnings growth is a beacon in the night. If you need more convincing beyond that EPS growth rate, don't forget about the reasonable remuneration and the high insider ownership. This may only be a fast rundown, but the takeaway for me is that Zhongzhi Pharmaceutical Holdings is worth keeping an eye on. We should say that we've discovered 1 warning sign for Zhongzhi Pharmaceutical Holdings that you should be aware of before investing here.

You can invest in any company you want. But if you prefer to focus on stocks that have demonstrated insider buying, here is a list of companies with insider buying in the last three months.

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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