Here's Why We Think Pareto Bank (OB:PARB) Is Well Worth Watching

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.

So if you're like me, you might be more interested in profitable, growing companies, like Pareto Bank (OB:PARB). 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. In comparison, loss making companies act like a sponge for capital - but unlike such a sponge they do not always produce something when squeezed.

See our latest analysis for Pareto Bank

How Fast Is Pareto Bank 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. That makes EPS growth an attractive quality for any company. We can see that in the last three years Pareto Bank grew its EPS by 5.1% per year. While that sort of growth rate isn't amazing, it does show the business is growing.

One way to double-check a company's growth is to look at how its revenue, and earnings before interest and tax (EBIT) margins are changing. Not all of Pareto Bank's revenue this year is revenue from operations, so keep in mind the revenue and margin numbers I've used might not be the best representation of the underlying business. Pareto Bank maintained stable EBIT margins over the last year, all while growing revenue 7.2% to kr710m. That's progress.

In the chart below, you can see how the company has grown earnings, and revenue, over time. Click on the chart to see the exact numbers.

In investing, as in life, the future matters more than the past. So why not check out this free interactive visualization of Pareto Bank's forecast profits?

Are Pareto Bank Insiders Aligned With All Shareholders?

Like that fresh smell in the air when the rains are coming, insider buying fills me with optimistic anticipation. This view is based on the possibility that stock purchases signal bullishness on behalf of the buyer. Of course, we can never be sure what insiders are thinking, we can only judge their actions.

Insiders both bought and sold Pareto Bank shares in the last year, but the good news is they spent kr250k more buying than they netted selling. When you weigh that up, it is a mild positive, indicating increased alignment between shareholders and management.

The good news, alongside the insider buying, for Pareto Bank bulls is that insiders (collectively) have a meaningful investment in the stock. To be specific, they have kr292m worth of shares. That's a lot of money, and no small incentive to work hard. That amounts to 9.7% of the company, demonstrating a degree of high-level alignment with shareholders.

While insiders are apparently happy to hold and accumulate shares, that is just part of the pretty picture. That's because on our analysis the CEO, Tiril Villum, is paid less than the median for similar sized companies. I discovered that the median total compensation for the CEOs of companies like Pareto Bank with market caps between kr1.7b and kr6.9b is about kr5.2m.

The Pareto Bank CEO received kr4.1m in compensation for the year ending . That seems pretty reasonable, especially given its below the median for similar sized companies. CEO compensation is hardly the most important aspect of a company to consider, but when its reasonable that does give me a little more confidence that leadership are looking out for shareholder interests. It can also be a sign of good governance, more generally.

Is Pareto Bank Worth Keeping An Eye On?

One important encouraging feature of Pareto Bank is that it is growing profits. On top of that, we've seen insiders buying shares even though they already own plenty. That makes the company a prime candidate for my watchlist - and arguably a research priority. You should always think about risks though. Case in point, we've spotted 1 warning sign for Pareto Bank you should be aware of.

As a growth investor I do like to see insider buying. But Pareto Bank isn't the only one. You can see a 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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This article by Simply Wall St is general in nature. 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.
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