Does Chennai Petroleum (NSE:CHENNPETRO) Deserve A Spot On Your Watchlist?

The excitement of investing in a company that can reverse its fortunes is a big draw for some speculators, so even companies that have no revenue, no profit, and a record of falling short, can manage to find investors. Sometimes these stories can cloud the minds of investors, leading them to invest with their emotions rather than on the merit of good company fundamentals. A loss-making company is yet to prove itself with profit, and eventually the inflow of external capital may dry up.

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 Chennai Petroleum (NSE:CHENNPETRO). 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.

See our latest analysis for Chennai Petroleum

Chennai Petroleum's Improving Profits

In the last three years Chennai Petroleum's earnings per share took off; so much so that it's a bit disingenuous to use these figures to try and deduce long term estimates. As a result, we'll zoom in on growth over the last year, instead. Chennai Petroleum's EPS skyrocketed from ₹116 to ₹171, in just one year; a result that's bound to bring a smile to shareholders. That's a impressive gain of 47%.

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. It was a year of stability for Chennai Petroleum as both revenue and EBIT margins remained have been flat over the past year. That's not a major concern but nor does it point to the long term growth we like to see.

You can take a look at the company's revenue and earnings growth trend, in the chart below. For finer detail, click on the image.

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 Chennai Petroleum's balance sheet strength, before getting too excited.

Are Chennai Petroleum Insiders Aligned With All Shareholders?

It's pleasing to see company leaders with putting their money on the line, so to speak, because it increases alignment of incentives between the people running the business, and its true owners. Shareholders will be pleased by the fact that insiders own Chennai Petroleum shares worth a considerable sum. Indeed, they hold ₹2.8b worth of its stock. This considerable investment should help drive long-term value in the business. Even though that's only about 2.0% of the company, it's enough money to indicate alignment between the leaders of the business and ordinary shareholders.

It's good to see that insiders are invested in the company, but are remuneration levels reasonable? Our quick analysis into CEO remuneration would seem to indicate they are. For companies with market capitalisations between ₹84b and ₹269b, like Chennai Petroleum, the median CEO pay is around ₹40m.

Chennai Petroleum's CEO took home a total compensation package of ₹7.0m in the year prior to March 2024. That's clearly well below average, so at a glance that arrangement seems generous to shareholders and points to a modest remuneration culture. 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. Generally, arguments can be made that reasonable pay levels attest to good decision-making.

Should You Add Chennai Petroleum To Your Watchlist?

You can't deny that Chennai Petroleum has grown its earnings per share at a very impressive rate. That's attractive. If you still have your doubts, remember too that company insiders have a considerable investment aligning themselves with the shareholders and CEO pay is quite modest compared to similarly sized companiess. Everyone has their own preferences when it comes to investing but it definitely makes Chennai Petroleum look rather interesting indeed. It's still necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Chennai Petroleum , and understanding it should be part of your investment process.

Although Chennai Petroleum certainly looks good, it may appeal to more investors if insiders were buying up shares. If you like to see companies with more skin in the game, then check out this handpicked selection of Indian companies that not only boast of strong growth but have strong insider backing.

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.