Here's Why China XLX Fertiliser (HKG:1866) Has Caught The Eye Of Investors

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 the reality is that when a company loses money each year, for long enough, its investors will usually take their share of those losses. 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.

In contrast to all that, many investors prefer to focus on companies like China XLX Fertiliser (HKG:1866), which has not only revenues, but also profits. Even if this company is fairly valued by the market, investors would agree that generating consistent profits will continue to provide China XLX Fertiliser with the means to add long-term value to shareholders.

See our latest analysis for China XLX Fertiliser

China XLX Fertiliser's Earnings Per Share Are Growing

The market is a voting machine in the short term, but a weighing machine in the long term, so you'd expect share price to follow earnings per share (EPS) outcomes eventually. So it makes sense that experienced investors pay close attention to company EPS when undertaking investment research. We can see that in the last three years China XLX Fertiliser grew its EPS by 9.4% per year. That's a good rate of growth, if it can be sustained.

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 we note China XLX Fertiliser achieved similar EBIT margins to last year, revenue grew by a solid 2.4% to CN¥23b. That's a real positive.

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.

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 XLX Fertiliser's balance sheet strength, before getting too excited.

Are China XLX Fertiliser Insiders Aligned With All Shareholders?

Investors are always searching for a vote of confidence in the companies they hold and insider buying is one of the key indicators for optimism on the market. 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.

It's good to see China XLX Fertiliser insiders walking the walk, by spending CN¥2.9m on shares in just twelve months. This, combined with the lack of sales from insiders, should be a great signal for shareholders in what's to come. Zooming in, we can see that the biggest insider purchase was by Executive Director & Executive Deputy GM - Henan XLX Fertiliser Qingjin Zhang for HK$1.1m worth of shares, at about HK$4.02 per share.

Along with the insider buying, another encouraging sign for China XLX Fertiliser is that insiders, as a group, have a considerable shareholding. Notably, they have an enviable stake in the company, worth CN¥986m. This totals to 18% of shares in the company. Enough to lead management's decision making process down a path that brings the most benefit to shareholders. Very encouraging.

While insiders are apparently happy to hold and accumulate shares, that is just part of the big picture. That's because China XLX Fertiliser's CEO, Wanlei Song, is paid at a relatively modest level when compared to other CEOs for companies of this size. For companies with market capitalisations between CN¥2.9b and CN¥12b, like China XLX Fertiliser, the median CEO pay is around CN¥3.4m.

China XLX Fertiliser's CEO took home a total compensation package of CN¥876k in the year prior to December 2023. First impressions seem to indicate a compensation policy that is favourable to shareholders. CEO compensation is hardly the most important aspect of a company to consider, but when it's reasonable, that gives a little more confidence that leadership are looking out for shareholder interests. It can also be a sign of a culture of integrity, in a broader sense.

Does China XLX Fertiliser Deserve A Spot On Your Watchlist?

As previously touched on, China XLX Fertiliser is a growing business, which is encouraging. On top of that, we've seen insiders buying shares even though they already own plenty. That should do plenty in prompting budding investors to undertake a bit more research - or even adding the company to their watchlists. What about risks? Every company has them, and we've spotted 3 warning signs for China XLX Fertiliser you should know about.

There are plenty of other companies that have insiders buying up shares. So if you like the sound of China XLX Fertiliser, you'll probably love this curated collection of companies in HK that have an attractive valuation alongside 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. 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.