Like a puppy chasing its tail, some new investors often chase 'the next big thing', even if that means buying 'story stocks' without revenue, let alone profit. But as Peter Lynch said in One Up On Wall Street, 'Long shots almost never pay off.'
In contrast to all that, I prefer to spend time on companies like MS Group Holdings (HKG:1451), which has not only revenues, but also profits. While profit is not necessarily a social good, it's easy to admire a business that can consistently produce it. Conversely, a loss-making company is yet to prove itself with profit, and eventually the sweet milk of external capital may run sour.
MS Group Holdings's Improving Profits
Even modest earnings per share growth (EPS) can create meaningful value, when it is sustained reliably from year to year. So it's no surprise that some investors are more inclined to invest in profitable businesses. Like the last firework on New Year's Eve accelerating into the sky, MS Group Holdings's EPS shot from HK$0.032 to HK$0.071, over the last year. Year on year growth of 124% is certainly a sight to behold.
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. MS Group Holdings's EBIT margins have actually improved by 3.7 percentage points in the last year, to reach 8.9%, but, on the flip side, revenue was down 3.2%. That falls short of ideal.
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.
MS Group Holdings isn't a huge company, given its market capitalization of HK$96m. That makes it extra important to check on its balance sheet strength.
Are MS Group Holdings Insiders Aligned With All Shareholders?
Personally, I like to see high insider ownership of a company, since it suggests that it will be managed in the interests of shareholders. So as you can imagine, the fact that MS Group Holdings insiders own a significant number of shares certainly appeals to me. Indeed, with a collective holding of 75%, 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. Of course, MS Group Holdings is a very small company, with a market cap of only HK$96m. So despite a large proportional holding, insiders only have HK$72m worth of stock. That's not a huge stake in absolute terms, but it should help keep insiders aligned with other shareholders.
It means a lot to see insiders invested in the business, but I find myself wondering if remuneration policies are shareholder friendly. Well, based on the CEO pay, I'd say they are indeed. For companies with market capitalizations under HK$1.6b, like MS Group Holdings, the median CEO pay is around HK$1.8m.
The CEO of MS Group Holdings was paid just HK$1.0k in total compensation for the year ending . You could consider this pay as somewhat symbolic, which suggests the CEO does not need a lot of compensation to stay motivated. 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 a culture of integrity, in a broader sense.
Should You Add MS Group Holdings To Your Watchlist?
MS Group Holdings's earnings per share growth have been levitating higher, like a mountain goat scaling the Alps. The cherry on top is that insiders own a bucket-load of shares, and the CEO pay seems really quite reasonable. The sharp increase in earnings could signal good business momentum. Big growth can make big winners, so I do think MS Group Holdings is worth considering carefully. We don't want to rain on the parade too much, but we did also find 2 warning signs for MS Group Holdings (1 can't be ignored!) that you need to be mindful of.
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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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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