Here's Why We Think Sumitomo Bakelite (TSE:4203) Is Well Worth Watching

Investors are often guided by the idea of discovering 'the next big thing', even if that means buying 'story stocks' without any revenue, let alone profit. Unfortunately, these high risk investments often have little probability of ever paying off, and many investors pay a price to learn their lesson. Loss-making companies are always racing against time to reach financial sustainability, so investors in these companies may be taking on more risk than they should.

If this kind of company isn't your style, you like companies that generate revenue, and even earn profits, then you may well be interested in Sumitomo Bakelite (TSE:4203). While profit isn't the sole metric that should be considered when investing, it's worth recognising businesses that can consistently produce it.

Check out our latest analysis for Sumitomo Bakelite

How Quickly Is Sumitomo Bakelite Increasing Earnings Per Share?

If a company can keep growing earnings per share (EPS) long enough, its share price should eventually follow. Therefore, there are plenty of investors who like to buy shares in companies that are growing EPS. We can see that in the last three years Sumitomo Bakelite grew its EPS by 12% per year. That growth rate is fairly good, assuming the company can keep it up.

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. While we note Sumitomo Bakelite achieved similar EBIT margins to last year, revenue grew by a solid 3.6% to JP¥294b. That's a real positive.

In the chart below, you can see how the company has grown earnings and revenue, over time. To see the actual numbers, click on the chart.

Fortunately, we've got access to analyst forecasts of Sumitomo Bakelite's future profits. You can do your own forecasts without looking, or you can take a peek at what the professionals are predicting.

Are Sumitomo Bakelite Insiders Aligned With All Shareholders?

Prior to investment, it's always a good idea to check that the management team is paid reasonably. Pay levels around or below the median, can be a sign that shareholder interests are well considered. The median total compensation for CEOs of companies similar in size to Sumitomo Bakelite, with market caps between JP¥288b and JP¥921b, is around JP¥141m.

Sumitomo Bakelite offered total compensation worth JP¥107m to its CEO in the year to March 2024. That comes in below the average for similar sized companies and seems pretty reasonable. While the level of CEO compensation shouldn't be the biggest factor in how the company is viewed, modest remuneration is a positive, because it suggests that the board keeps shareholder interests in mind. It can also be a sign of a culture of integrity, in a broader sense.

Should You Add Sumitomo Bakelite To Your Watchlist?

As previously touched on, Sumitomo Bakelite is a growing business, which is encouraging. Not only that, but the CEO is paid quite reasonably, which should prompt investors to feel more trusting of the board of directors. So all in all Sumitomo Bakelite is worthy at least considering for your watchlist. Still, you should learn about the 1 warning sign we've spotted with Sumitomo Bakelite.

There's always the possibility of doing well buying stocks that are not growing earnings and do not have insiders buying shares. But for those who consider these important metrics, we encourage you to check out companies that do have those features. You can access a tailored list of Japanese companies which have demonstrated growth backed by significant insider holdings.

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.