Do China Ruyi Holdings' (HKG:136) Earnings Warrant Your Attention?

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 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.

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 Ruyi Holdings (HKG:136). Now this is not to say that the company presents the best investment opportunity around, but profitability is a key component to success in business.

Check out our latest analysis for China Ruyi Holdings

China Ruyi Holdings' Improving Profits

Strong earnings per share (EPS) results are an indicator of a company achieving solid profits, which investors look upon favourably and so the share price tends to reflect great EPS performance. So for many budding investors, improving EPS is considered a good sign. Commendations have to be given in seeing that China Ruyi Holdings grew its EPS from CN¥0.0015 to CN¥0.13, in one short year. When you see earnings grow that quickly, it often means good things ahead for the company. This could point to the business hitting a point of inflection.

It's often helpful to take a look at earnings before interest and tax (EBIT) margins, as well as revenue growth, to get another take on the quality of the company's growth. The good news is that China Ruyi Holdings is growing revenues, and EBIT margins improved by 15.5 percentage points to 26%, over the last year. That's great to see, on both counts.

You can take a look at the company's revenue and earnings growth trend, in the chart below. To see the actual numbers, click on the chart.

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 Ruyi Holdings' balance sheet strength, before getting too excited.

Are China Ruyi Holdings 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.

We did see some selling in the last twelve months, but that's insignificant compared to the whopping CN¥2.1b that the company insider, ShaoYu Li spent acquiring shares. The average price paid was about CN¥1.28. Insider buying like this is a rare occurrence and should stoke the interest of the market and shareholders alike.

On top of the insider buying, it's good to see that China Ruyi Holdings insiders have a valuable investment in the business. Notably, they have an enviable stake in the company, worth CN¥4.9b. This totals to 28% of shares in the company. Enough to lead management's decision making process down a path that brings the most benefit to shareholders. So there is opportunity here to invest in a company whose management have tangible incentives to deliver.

Does China Ruyi Holdings Deserve A Spot On Your Watchlist?

China Ruyi Holdings' earnings per share have been soaring, with growth rates sky high. To sweeten the deal, insiders have significant skin in the game with one even acquiring more. These factors seem to indicate the company's potential and that it has reached an inflection point. We'd suggest China Ruyi Holdings belongs near the top of your watchlist. It's still necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with China Ruyi Holdings (at least 1 which is a bit unpleasant) , and understanding them should be part of your investment process.

Keen growth investors love to see insider buying. Thankfully, China Ruyi Holdings isn't the only one. You can see a 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. 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.