We Ran A Stock Scan For Earnings Growth And China XLX Fertiliser (HKG:1866) Passed With Ease

It's common for many investors, especially those who are inexperienced, to buy shares in companies with a good story even if these companies are loss-making. But as Peter Lynch said in One Up On Wall Street, 'Long shots almost never pay off.' 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.

So if this idea of high risk and high reward doesn't suit, you might be more interested in profitable, growing companies, like China XLX Fertiliser (HKG:1866). While this doesn't necessarily speak to whether it's undervalued, the profitability of the business is enough to warrant some appreciation - especially if its growing.

View 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. Therefore, there are plenty of investors who like to buy shares in companies that are growing EPS. Shareholders will be happy to know that China XLX Fertiliser's EPS has grown 20% each year, compound, over three years. If growth like this continues on into the future, then shareholders will have plenty to smile about.

One way to double-check a company's growth is to look at how its revenue, and earnings before interest and tax (EBIT) margins are changing. The good news is that China XLX Fertiliser is growing revenues, and EBIT margins improved by 6.6 percentage points to 16%, over the last year. That's great to see, on both counts.

The chart below shows how the company's bottom and top lines have progressed over time. For finer detail, click on the image.

While profitability drives the upside, prudent investors always check the balance sheet, too.

Are China XLX Fertiliser Insiders Aligned With All Shareholders?

It's said that there's no smoke without fire. For investors, insider buying is often the smoke that indicates which stocks could set the market alight. Because often, the purchase of stock is a sign that the buyer views it as undervalued. However, small purchases are not always indicative of conviction, and insiders don't always get it right.

The good news for China XLX Fertiliser is that one insider has illustrated their belief in the company's future with a huge purchase of shares in the last 12 months. Specifically, the Executive Director, Yunhua Yan, accumulated CN¥367m worth of shares at a price of CN¥6.50. Big insider buys like that are a rarity and should prompt discussion on the merits of the business.

The good news, alongside the insider buying, for China XLX Fertiliser bulls is that insiders (collectively) have a meaningful investment in the stock. We note that their impressive stake in the company is worth CN¥1.3b. Coming in at 18% of the business, that holding gives insiders a lot of influence, and plenty of reason to generate value for shareholders. So there is opportunity here to invest in a company whose management have tangible incentives to deliver.

While insiders already own a significant amount of shares, and they have been buying more, the good news for ordinary shareholders does not stop there. That's because on our analysis the CEO, Tongsheng Ma, is paid less than the median for similar sized companies. The median total compensation for CEOs of companies similar in size to China XLX Fertiliser, with market caps between CN¥2.7b and CN¥11b, is around CN¥3.7m.

China XLX Fertiliser's CEO took home a total compensation package of CN¥810k in the year prior to December 2021. That looks like a modest pay packet, and may hint at a certain respect for the interests of shareholders. 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 XLX Fertiliser Deserve A Spot On Your Watchlist?

You can't deny that China XLX Fertiliser has grown its earnings per share at a very impressive rate. That's attractive. Moreover, the management and board of the company hold a significant stake in the company, with one party adding to this total. These things considered, this is one stock worth watching. You should always think about risks though. Case in point, we've spotted 3 warning signs for China XLX Fertiliser you should be aware of.

The good news is that China XLX Fertiliser is not the only growth stock with insider buying. Here's a list of them... 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. 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.