Here's Why I Think Allied Digital Services (NSE:ADSL) Is An Interesting Stock

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 Peter Lynch said in One Up On Wall Street, 'Long shots almost never pay off.'

If, on the other hand, you like companies that have revenue, and even earn profits, then you may well be interested in Allied Digital Services (NSE:ADSL). While profit is not necessarily a social good, it's easy to admire a business that can consistently produce it. Conversely, a loss-making company is yet to prove itself with profit, and eventually the sweet milk of external capital may run sour.

View our latest analysis for Allied Digital Services

How Fast Is Allied Digital Services Growing Its Earnings Per Share?

In a capitalist society capital chases profits, and that means share prices tend rise with earnings per share (EPS). So like the hint of a smile on a face that I love, growing EPS generally makes me look twice. You can imagine, then, that it almost knocked my socks off when I realized that Allied Digital Services grew its EPS from ₹2.82 to ₹8.90, 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.

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. Allied Digital Services shareholders can take confidence from the fact that EBIT margins are up from 4.9% to 8.4%, and revenue is growing. That's great to see, on both counts.

In the chart below, you can see how the company has grown earnings, and revenue, over time. Click on the chart to see the exact numbers.

Since Allied Digital Services is no giant, with a market capitalization of ₹6.4b, so you should definitely check its cash and debt before getting too excited about its prospects.

Are Allied Digital Services Insiders Aligned With All Shareholders?

Like that fresh smell in the air when the rains are coming, insider buying fills me with optimistic anticipation. This view is based on the possibility that stock purchases signal bullishness on behalf of the buyer. Of course, we can never be sure what insiders are thinking, we can only judge their actions.

The good news for Allied Digital Services shareholders is that no insiders reported selling shares in the last year. With that in mind, it's heartening that Rohan Shah, the of the company, paid ₹1.1m for shares at around ₹63.36 each.

On top of the insider buying, we can also see that Allied Digital Services insiders own a large chunk of the company. In fact, they own 60% of the company, so they will share in the same delights and challenges experienced by the ordinary shareholders. This makes me think they will be incentivised to plan for the long term - something I like to see. With that sort of holding, insiders have about ₹3.9b riding on the stock, at current prices. That's nothing to sneeze at!

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. The cherry on top is that the CEO, Paresh Shah is paid comparatively modestly to CEOs at similar sized companies. For companies with market capitalizations under ₹15b, like Allied Digital Services, the median CEO pay is around ₹3.0m.

The Allied Digital Services CEO received total compensation of only ₹1.2m in the year to . You could consider this pay as somewhat symbolic, which suggests the CEO does not need a lot of compensation to stay motivated. 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. I'd also argue reasonable pay levels attest to good decision making more generally.

Should You Add Allied Digital Services To Your Watchlist?

Allied Digital Services's earnings per share have taken off like a rocket aimed right at the moon. The incing on the cake is that insiders own a large chunk of the company and one has even been buying more shares. This quick rundown suggests that the business may be of good quality, and also at an inflection point, so maybe Allied Digital Services deserves timely attention. You still need to take note of risks, for example - Allied Digital Services has 5 warning signs we think you should be aware of.

As a growth investor I do like to see insider buying. But Allied Digital Services 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.