Should You Be Adding Rakon (NZSE:RAK) To Your Watchlist Today?

The excitement of investing in a company that can reverse its fortunes is a big draw for some speculators, so even companies that have no revenue, no profit, and a record of falling short, can manage to find investors. 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.

Despite being in the age of tech-stock blue-sky investing, many investors still adopt a more traditional strategy; buying shares in profitable companies like Rakon (NZSE:RAK). Even if this company is fairly valued by the market, investors would agree that generating consistent profits will continue to provide Rakon with the means to add long-term value to shareholders.

View our latest analysis for Rakon

Rakon's Improving Profits

In business, profits are a key measure of success; and share prices tend to reflect earnings per share (EPS) performance. So a growing EPS generally brings attention to a company in the eyes of prospective investors. It's an outstanding feat for Rakon to have grown EPS from NZ$0.042 to NZ$0.15 in just one year. Even though that growth rate may not be repeated, that looks like a breakout improvement. This could point to the business hitting a point of inflection.

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. The music to the ears of Rakon shareholders is that EBIT margins have grown from 7.9% to 25% in the last 12 months and revenues are on an upwards trend as well. Both of which are great metrics to check off for potential growth.

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.

Rakon isn't a huge company, given its market capitalisation of NZ$304m. That makes it extra important to check on its balance sheet strength.

Are Rakon 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. However, insiders are sometimes wrong, and we don't know the exact thinking behind their acquisitions.

It's nice to see that there have been no reports of any insiders selling shares in Rakon in the previous 12 months. With that in mind, it's heartening that Lorraine Witten, the Independent Chairman of the company, paid NZ$30k for shares at around NZ$1.87 each. It seems that at least one insider is prepared to show the market there is potential within Rakon.

On top of the insider buying, it's good to see that Rakon insiders have a valuable investment in the business. As a matter of fact, their holding is valued at NZ$48m. That shows significant buy-in, and may indicate conviction in the business strategy. As a percentage, this totals to 16% of the shares on issue for the business, an appreciable amount considering the market cap.

Is Rakon Worth Keeping An Eye On?

Rakon's earnings have taken off in quite an impressive fashion. To sweeten the deal, insiders have significant skin in the game with one even acquiring more. These factors seem to indicate the company's potential and that it has reached an inflection point. We'd suggest Rakon belongs near the top of your watchlist. You still need to take note of risks, for example - Rakon has 1 warning sign we think you should be aware of.

The good news is that Rakon is not the only growth stock with insider buying. Here's a list of them... 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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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.