I Ran A Stock Scan For Earnings Growth And Ratos (STO:RATO B) Passed With Ease

Some have more dollars than sense, they say, so even companies that have no revenue, no profit, and a record of falling short, can easily find investors. 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 Ratos (STO:RATO B). Even if the shares are fully valued today, most capitalists would recognize its profits as the demonstration of steady value generation. 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.

Check out our latest analysis for Ratos

Ratos's Improving Profits

In a capitalist society capital chases profits, and that means share prices tend rise with earnings per share (EPS). So like a ray of sunshine through a gap in the clouds, improving EPS is considered a good sign. You can imagine, then, that it almost knocked my socks off when I realized that Ratos grew its EPS from kr0.44 to kr1.49, in one short year. Even though that growth rate is unlikely to be repeated, that looks like a breakout improvement. Could this be a sign that the business has reached an inflection point?

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. Ratos shareholders can take confidence from the fact that EBIT margins are up from 4.9% to 7.5%, and revenue is growing. Ticking those two boxes is a good sign of growth, in my book.

The chart below shows how the company's bottom and top lines have progressed over time. To see the actual numbers, click on the chart.

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 Ratos's balance sheet strength, before getting too excited.

Are Ratos Insiders Aligned With All Shareholders?

Like standing at the lookout, surveying the horizon at sunrise, insider buying, for some investors, sparks joy. That's because insider buying often indicates that those closest to the company have confidence that the share price will perform well. Of course, we can never be sure what insiders are thinking, we can only judge their actions.

Although we did see some insider selling (worth -kr4.1m) this was overshadowed by a mountain of buying, totalling kr13m in just one year. I find this encouraging because it suggests they are optimistic about the Ratos's future. It is also worth noting that it was Deputy Chairman Jan Soderberg who made the biggest single purchase, worth kr6.5m, paying kr50.00 per share.

Along with the insider buying, another encouraging sign for Ratos is that insiders, as a group, have a considerable shareholding. Notably, they have an enormous stake in the company, worth kr3.7b. That equates to 20% of the company, making insiders powerful and aligned with other shareholders. Very encouraging.

Is Ratos Worth Keeping An Eye On?

Ratos's earnings per share have taken off like a rocket aimed right at the moon. Just as heartening; insiders both own and are buying more stock. Because of the potential that it has reached an inflection point, I'd suggest Ratos belongs on the top of your watchlist. We don't want to rain on the parade too much, but we did also find 2 warning signs for Ratos that you need to be mindful of.

The good news is that Ratos 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.