Does Creades (STO:CRED A) Deserve A Spot On Your Watchlist?

For beginners, it can seem like a good idea (and an exciting prospect) to buy a company that tells a good story to investors, even if it completely lacks a track record of revenue and profit. But as Warren Buffett has mused, 'If you've been playing poker for half an hour and you still don't know who the patsy is, you're the patsy.' When they buy such story stocks, investors are all too often the patsy.

In the age of tech-stock blue-sky investing, my choice may seem old fashioned; I still prefer profitable companies like Creades (STO:CRED A). 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.

Check out our latest analysis for Creades

How Fast Is Creades Growing Its Earnings Per Share?

Over the last three years, Creades has grown earnings per share (EPS) like young bamboo after rain; fast, and from a low base. So I don't think the percent growth rate is particularly meaningful. As a result, I'll zoom in on growth over the last year, instead. Creades has grown its trailing twelve month EPS from kr29.26 to kr30.88, in the last year. That amounts to a small improvement of 5.6%.

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. Not all of Creades'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. Creades shareholders can take confidence from the fact that EBIT margins are up from 91% to 94%, and revenue is growing. Ticking those two boxes is a good sign of growth, in my book.

You can take a look at the company's revenue and earnings growth trend, in the chart below. For finer detail, click on the image.

While it's always good to see growing profits, you should always remember that a weak balance sheet could come back to bite. So check Creades's balance sheet strength, before getting too excited.

Are Creades Insiders Aligned With All Shareholders?

I like company leaders to have some skin in the game, so to speak, because it increases alignment of incentives between the people running the business, and its true owners. As a result, I'm encouraged by the fact that insiders own Creades shares worth a considerable sum. Indeed, they hold kr135m worth of its stock. That shows significant buy-in, and may indicate conviction in the business strategy. Even though that's only about 0.9% of the company, it's enough money to indicate alignment between the leaders of the business and ordinary shareholders.

Is Creades Worth Keeping An Eye On?

One important encouraging feature of Creades is that it is growing profits. If that's not enough on its own, there is also the rather notable levels of insider ownership. The combination sparks joy for me, so I'd consider keeping the company on a watchlist. It's still necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Creades (at least 1 which doesn't sit too well with us) , and understanding these should be part of your investment process.

Of course, you can do well (sometimes) buying stocks that are not growing earnings and do not have insiders buying shares. But as a growth investor I always like to check out companies that do have those features. You can access 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. 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.