It’s only natural that many investors, especially those who are new to the game, prefer to buy shares in ‘sexy’ stocks with a good story, even if those businesses lose money. 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.
So if you’re like me, you might be more interested in profitable, growing companies, like Kanda Tsushinki (TYO:1992). While that doesn’t make the shares worth buying at any price, you can’t deny that successful capitalism requires profit, eventually. In comparison, loss making companies act like a sponge for capital – but unlike such a sponge they do not always produce something when squeezed.
Kanda Tsushinki’s Earnings Per Share Are Growing.
The market is a voting machine in the short term, but a weighing machine in the long term, so share price follows earnings per share (EPS) eventually. Therefore, there are plenty of investors who like to buy shares in companies that are growing EPS. Impressively, Kanda Tsushinki has grown EPS by 25% per year, compound, in the last three years. As a general rule, we’d say that if a company can keep up that sort of growth, shareholders will be smiling.
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. Kanda Tsushinki’s EBIT margins are flat but, of some concern, its revenue is actually down. And that does make me a little more cautious of the stock.
In the chart below, you can see how the company has grown earnings, and revenue, over time. For finer detail, click on the image.
Kanda Tsushinki isn’t a huge company, given its market capitalization of JP¥2.5b. That makes it extra important to check on its balance sheet strength.
Are Kanda Tsushinki Insiders Aligned With All Shareholders?
Many consider high insider ownership to be a strong sign of alignment between the leaders of a company and the ordinary shareholders. So we’re pleased to report that Kanda Tsushinki insiders own a meaningful share of the business. In fact, they own 40% 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 JP¥2.5b Kanda Tsushinki is really small for a listed company. That means insiders only have JP¥1.0b worth of shares, despite the large proportional holding. That might not be a huge sum but it should be enough to keep insiders motivated!
Should You Add Kanda Tsushinki To Your Watchlist?
Given my belief that share price follows earnings per share you can easily imagine how I feel about Kanda Tsushinki’s strong EPS growth. Further, the high level of insider ownership impresses me, and suggests that I’m not the only one who appreciates the EPS growth. So this is very likely the kind of business that I like to spend time researching, with a view to discerning its true value. Of course, just because Kanda Tsushinki is growing does not mean it is undervalued. If you’re wondering about the valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Of course, you can do well (sometimes) buying stocks that are not growing earnings and do not have insiders buying shares. But as a growth investor I always like to check out companies that do have those features. You can access 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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