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. And in their study titled Who Falls Prey to the Wolf of Wall Street?' Leuz et. al. found that it is 'quite common' for investors to lose money by buying into 'pump and dump' schemes.
In the age of tech-stock blue-sky investing, my choice may seem old fashioned; I still prefer profitable companies like Changhae Ethanol (KOSDAQ:004650). Now, I'm not saying that the stock is necessarily undervalued today; but I can't shake an appreciation for the profitability of the business itself. Loss-making companies are always racing against time to reach financial sustainability, but time is often a friend of the profitable company, especially if it is growing.
Changhae Ethanol's Improving Profits
In the last three years Changhae Ethanol's earnings per share took off like a rocket; fast, and from a low base. So the actual rate of growth doesn't tell us much. Thus, it makes sense to focus on more recent growth rates, instead. Like the last firework on New Year's Eve accelerating into the sky, Changhae Ethanol's EPS shot from ₩1,387 to ₩2,627, over the last year. You don't see 89% year-on-year growth like that, very often.
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. To cut to the chase Changhae Ethanol's EBIT margins dropped last year, and so did its revenue. That will not make it easy to grow profits, to say the least.
The chart below shows how the company's bottom and top lines have progressed over time. Click on the chart to see the exact numbers.
Since Changhae Ethanol is no giant, with a market capitalization of ₩99b, so you should definitely check its cash and debt before getting too excited about its prospects.
Are Changhae Ethanol Insiders Aligned With All Shareholders?
It makes me feel more secure owning shares in a company if insiders also own shares, thusly more closely aligning our interests. As a result, I'm encouraged by the fact that insiders own Changhae Ethanol shares worth a considerable sum. To be specific, they have ₩30b worth of shares. That shows significant buy-in, and may indicate conviction in the business strategy. That amounts to 31% of the company, demonstrating a degree of high-level alignment with shareholders.
Does Changhae Ethanol Deserve A Spot On Your Watchlist?
Changhae Ethanol's earnings have taken off like any random crypto-currency did, back in 2017. That sort of growth is nothing short of eye-catching, and the large investment held by insiders certainly brightens my view of the company. The hope is, of course, that the strong growth marks a fundamental improvement in the business economics. So to my mind Changhae Ethanol is worth putting on your watchlist; after all, shareholders do well when the market underestimates fast growing companies. What about risks? Every company has them, and we've spotted 3 warning signs for Changhae Ethanol you should know about.
You can invest in any company you want. But if you prefer to focus on stocks that have demonstrated insider buying, here is a list of companies with insider buying in the last three months.
Please note the insider transactions discussed in this article refer to reportable transactions in the relevant jurisdiction.
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