Some have more dollars than sense, they say, so even companies that have no revenue, no profit, and a record of falling short, can easily find investors. But as Warren Buffett has mused, 'If you've been playing poker for half an hour and you still don't know who the patsy is, you're the patsy.' When they buy such story stocks, investors are all too often the patsy.
In the age of tech-stock blue-sky investing, my choice may seem old fashioned; I still prefer profitable companies like Advanced Enzyme Technologies (NSE:ADVENZYMES). Even if the shares are fully valued today, most capitalists would recognize its profits as the demonstration of steady value generation. In comparison, loss making companies act like a sponge for capital - but unlike such a sponge they do not always produce something when squeezed.
How Fast Is Advanced Enzyme Technologies Growing?
If a company can keep growing earnings per share (EPS) long enough, its share price will eventually follow. It's no surprise, then, that I like to invest in companies with EPS growth. Advanced Enzyme Technologies managed to grow EPS by 12% per year, over three years. That growth rate is fairly good, assuming the company can keep it up.
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. Advanced Enzyme Technologies maintained stable EBIT margins over the last year, all while growing revenue 6.1% to ₹4.5b. That's progress.
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.
Since Advanced Enzyme Technologies is no giant, with a market capitalization of ₹19b, so you should definitely check its cash and debt before getting too excited about its prospects.
Are Advanced Enzyme Technologies Insiders Aligned With All Shareholders?
Like the kids in the streets standing up for their beliefs, insider share purchases give me reason to believe in a brighter future. That's because insider buying often indicates that those closest to the company have confidence that the share price will perform well. However, small purchases are not always indicative of conviction, and insiders don't always get it right.
The good news is that Advanced Enzyme Technologies insiders spent a whopping ₹64m on stock in just one year, and I didn't see any selling. And so I find myself almost expectant, and certainly hopeful, that this large outlay signals prescient optimism for the business. Zooming in, we can see that the biggest insider purchase was by Director of Operations & Whole Time Director Mukund Kabra for ₹13m worth of shares, at about ₹99.00 per share.
On top of the insider buying, we can also see that Advanced Enzyme Technologies insiders own a large chunk of the company. Actually, with 47% of the company to their names, insiders are profoundly invested in the business. I'm reassured by this kind of alignment, as it suggests the business will be run for the benefit of shareholders. In terms of absolute value, insiders have ₹9.1b invested in the business, using the current share price. That should be more than enough to keep them focussed on creating shareholder value!
Does Advanced Enzyme Technologies Deserve A Spot On Your Watchlist?
One positive for Advanced Enzyme Technologies is that it is growing EPS. That's nice to see. On top of that, we've seen insiders buying shares even though they already own plenty. To me, that all makes it well worth a spot on your watchlist, as well as continuing research. You should always think about risks though. Case in point, we've spotted 1 warning sign for Advanced Enzyme Technologies you should be aware of.
As a growth investor I do like to see insider buying. But Advanced Enzyme Technologies 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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