With EPS Growth And More, Rakon (NZSE:RAK) Makes An Interesting Case

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. A loss-making company is yet to prove itself with profit, and eventually the inflow of external capital may dry up.

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.

See our latest analysis for Rakon

Rakon's Improving Profits

Over the last three years, Rakon has grown earnings per share (EPS) at as impressive rate from a relatively low point, resulting in a three year percentage growth rate that isn't particularly indicative of expected future performance. As a result, we'll zoom in on growth over the last year, instead. To the delight of shareholders, Rakon's EPS soared from NZ$0.11 to NZ$0.13, over the last year. That's a commendable gain of 25%.

It's often helpful to take a look at earnings before interest and tax (EBIT) margins, as well as revenue growth, to get another take on the quality of the company's growth. Rakon shareholders can take confidence from the fact that EBIT margins are up from 17% to 22%, and revenue is growing. That's great to see, on both counts.

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.

Since Rakon is no giant, with a market capitalisation of NZ$216m, you should definitely check its cash and debt before getting too excited about its prospects.

Are Rakon Insiders Aligned With All Shareholders?

Insider interest in a company always sparks a bit of intrigue and many investors are on the lookout for companies where insiders are putting their money where their mouth is. That's because insider buying often indicates that those closest to the company have confidence that the share price will perform well. However, small purchases are not always indicative of conviction, and insiders don't always get it right.

We note that Rakon insiders spent NZ$139k on stock, over the last year; in contrast, we didn't see any selling. That's nice to see, because it suggests insiders are optimistic. Zooming in, we can see that the biggest insider purchase was by Independent Non Executive Director Steve Tucker for NZ$43k worth of shares, at about NZ$1.44 per share.

Along with the insider buying, another encouraging sign for Rakon is that insiders, as a group, have a considerable shareholding. Indeed, they hold NZ$34m worth of its stock. That shows significant buy-in, and may indicate conviction in the business strategy. That amounts to 16% of the company, demonstrating a degree of high-level alignment with shareholders.

Does Rakon Deserve A Spot On Your Watchlist?

You can't deny that Rakon has grown its earnings per share at a very impressive rate. That's attractive. On top of that, insiders own a significant stake in the company and have been buying more shares. These things considered, this is one stock worth watching. Don't forget that there may still be risks. For instance, we've identified 1 warning sign for Rakon that 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.