If You Like EPS Growth Then Check Out California Software (NSE:CALSOFT) Before It's Too Late

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

So if you're like me, you might be more interested in profitable, growing companies, like California Software (NSE:CALSOFT). Even if the shares are fully valued today, most capitalists would recognize its profits as the demonstration of steady value generation. 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 California Software

How Fast Is California Software 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. It is therefore awe-striking that California Software's EPS went from ₹0.026 to ₹3.28 in just one year. Even though that growth rate is unlikely to be repeated, that looks like a breakout improvement. But the key is discerning whether something profound has changed, or if this is a just a one-off boost.

I like to take a look at earnings before interest and (EBIT) tax margins, as well as revenue growth, to get another take on the quality of the company's growth. The good news is that California Software is growing revenues, and EBIT margins improved by 80.0 percentage points to 71%, over the last year. That's great to see, on both counts.

The chart below shows how the company's bottom and top lines have progressed over time. For finer detail, click on the image.

California Software isn't a huge company, given its market capitalization of ₹740m. That makes it extra important to check on its balance sheet strength.

Are California Software 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. However, insiders are sometimes wrong, and we don't know the exact thinking behind their acquisitions.

It's good to see California Software insiders walking the walk, by spending ₹45m on shares in just twelve months. When you contrast that with the complete lack of sales, it's easy for shareholders to brim with joyful expectancy. It is also worth noting that it was Whole-Time Director Vijayakumar Madhavan who made the biggest single purchase, worth ₹25m, paying ₹50.00 per share.

And the insider buying isn't the only sign of alignment between shareholders and the board, since California Software insiders own more than a third of the company. In fact, they own 50% of the shares, making insiders a very influential shareholder group. I'm reassured by this kind of alignment, as it suggests the business will be run for the benefit of shareholders. Valued at only ₹740m California Software is really small for a listed company. So despite a large proportional holding, insiders only have ₹373m worth of stock. That might not be a huge sum but it should be enough to keep insiders motivated!

Is California Software Worth Keeping An Eye On?

California Software's earnings per share growth have been levitating higher, like a mountain goat scaling the Alps. What's more insiders own a significant stake in the company and have been buying more shares. Because of the potential that it has reached an inflection point, I'd suggest California Software belongs on the top of your watchlist. You should always think about risks though. Case in point, we've spotted 4 warning signs for California Software you should be aware of, and 3 of them are potentially serious.

There are plenty of other companies that have insiders buying up shares. So if you like the sound of California Software, you'll probably love this free list of growing companies that insiders are buying.

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.