Stock Analysis

Do KPI Green Energy's (NSE:KPIGREEN) Earnings Warrant Your Attention?

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It's common for many investors, especially those who are inexperienced, to buy shares in companies with a good story even if these companies are loss-making. But as Peter Lynch said in One Up On Wall Street, 'Long shots almost never pay off.' While a well funded company may sustain losses for years, it will need to generate a profit eventually, or else investors will move on and the company will wither away.

In contrast to all that, many investors prefer to focus on companies like KPI Green Energy (NSE:KPIGREEN), which has not only revenues, but also profits. Even if this company is fairly valued by the market, investors would agree that generating consistent profits will continue to provide KPI Green Energy with the means to add long-term value to shareholders.

See our latest analysis for KPI Green Energy

KPI Green Energy's Improving Profits

In the last three years KPI Green Energy'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. So it would be better to isolate the growth rate over the last year for our analysis. To the delight of shareholders, KPI Green Energy's EPS soared from ₹23.76 to ₹36.75, over the last year. That's a fantastic gain of 55%.

Top-line growth is a great indicator that growth is sustainable, and combined with a high earnings before interest and taxation (EBIT) margin, it's a great way for a company to maintain a competitive advantage in the market. While KPI Green Energy did well to grow revenue over the last year, EBIT margins were dampened at the same time. So if EBIT margins can stabilize, this top-line growth should pay off for shareholders.

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

NSEI:KPIGREEN Earnings and Revenue History November 13th 2022

Since KPI Green Energy is no giant, with a market capitalisation of ₹15b, you should definitely check its cash and debt before getting too excited about its prospects.

Are KPI Green Energy Insiders Aligned With All Shareholders?

Investors are always searching for a vote of confidence in the companies they hold and insider buying is one of the key indicators for optimism on the market. Because often, the purchase of stock is a sign that the buyer views it as undervalued. Of course, we can never be sure what insiders are thinking, we can only judge their actions.

Even though some insiders sold down their holdings, their actions speak louder than words with ₹40m more invested than sold by people who know they company best. This overall confidence in the company at current the valuation signals their optimism. We also note that it was the Chairman & MD, Farukbhai Patel, who made the biggest single acquisition, paying ₹7.6m for shares at about ₹762 each.

These recent buys aren't the only encouraging sign for shareholders, as a look at the shareholder registry for KPI Green Energy will reveal that insiders own a significant piece of the pie. To be exact, company insiders hold 66% of the company, so their decisions have a significant impact on their investments. Intuition will tell you this is a good sign because it suggests they will be incentivised to build value for shareholders over the long term. In terms of absolute value, insiders have ₹9.8b invested in the business, at the current share price. So there's plenty there to keep them focused!

Shareholders have more to smile about than just insiders adding more shares to their already sizeable holdings. That's because on our analysis the CEO, Farukbhai Patel, is paid less than the median for similar sized companies. The median total compensation for CEOs of companies similar in size to KPI Green Energy, with market caps between ₹8.1b and ₹32b, is around ₹20m.

The CEO of KPI Green Energy only received ₹7.2m in total compensation for the year ending March 2022. That's clearly well below average, so at a glance that arrangement seems generous to shareholders and points to a modest remuneration culture. 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. Generally, arguments can be made that reasonable pay levels attest to good decision-making.

Does KPI Green Energy Deserve A Spot On Your Watchlist?

For growth investors, KPI Green Energy's raw rate of earnings growth is a beacon in the night. Furthermore, company insiders have been adding to their significant stake in the company. So it's fair to say that this stock may well deserve a spot on your watchlist. You should always think about risks though. Case in point, we've spotted 4 warning signs for KPI Green Energy you should be aware of, and 2 of them are concerning.

There are plenty of other companies that have insiders buying up shares. So if you like the sound of KPI Green Energy, 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.

Valuation is complex, but we're helping make it simple.

Find out whether KPI Green Energy is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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