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 completely 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.
If, on the other hand, you like companies that have revenue, and even earn profits, then you may well be interested in Laurus Labs (NSE:LAURUSLABS). Now, I'm not saying that the stock is necessarily undervalued today; but I can't shake an appreciation for the profitability of the business itself. Loss-making companies are always racing against time to reach financial sustainability, but time is often a friend of the profitable company, especially if it is growing.
How Fast Is Laurus Labs Growing Its Earnings Per Share?
In business, though not in life, profits are a key measure of success; and share prices tend to reflect earnings per share (EPS). So like a ray of sunshine through a gap in the clouds, improving EPS is considered a good sign. You can imagine, then, that it almost knocked my socks off when I realized that Laurus Labs grew its EPS from ₹4.79 to ₹18.36, in one short year. When you see earnings grow that quickly, it often means good things ahead for the company. But the key is discerning whether something profound has changed, or if this is a just a one-off boost.
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 Laurus Labs is growing revenues, and EBIT margins improved by 14.8 percentage points to 28%, over the last year. Ticking those two boxes is a good sign of growth, in my book.
The chart below shows how the company's bottom and top lines have progressed over time. For finer detail, click on the image.
Fortunately, we've got access to analyst forecasts of Laurus Labs's future profits. You can do your own forecasts without looking, or you can take a peek at what the professionals are predicting.
Are Laurus Labs Insiders Aligned With All Shareholders?
Like that fresh smell in the air when the rains are coming, insider buying fills me with optimistic anticipation. That's because insider buying often indicates that those closest to the company have confidence that the share price will perform well. Of course, we can never be sure what insiders are thinking, we can only judge their actions.
Although we did see some insider selling (worth -₹65m) this was overshadowed by a mountain of buying, totalling ₹217m in just one year. This makes me even more interested in Laurus Labs because it suggests that those who understand the company best, are optimistic. Zooming in, we can see that the biggest insider purchase was by Head of Quality & Executive Director Lakshmana Rao Chunduru for ₹98m worth of shares, at about ₹247 per share.
Along with the insider buying, another encouraging sign for Laurus Labs is that insiders, as a group, have a considerable shareholding. Indeed, they have a glittering mountain of wealth invested in it, currently valued at ₹91b. Coming in at 34% of the business, that holding gives insiders a lot of influence, and plenty of reason to generate value for shareholders. Very encouraging.
Should You Add Laurus Labs To Your Watchlist?
Laurus Labs's earnings per share growth have been levitating higher, like a mountain goat scaling the Alps. Just as heartening; insiders both own and are buying more stock. This quick rundown suggests that the business may be of good quality, and also at an inflection point, so maybe Laurus Labs deserves timely attention. However, before you get too excited we've discovered 3 warning signs for Laurus Labs (1 makes us a bit uncomfortable!) that you should be aware of.
As a growth investor I do like to see insider buying. But Laurus Labs 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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