With EPS Growth And More, Ratos (STO:RATO B) Is Interesting

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 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.

See our latest analysis for Ratos

Ratos's Improving Profits

Over the last three years, Ratos 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. Ratos boosted its trailing twelve month EPS from kr1.75 to kr2.18, in the last year. I doubt many would complain about that 25% gain.

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. While we note Ratos's EBIT margins were flat over the last year, revenue grew by a solid 18% to kr24b. That's a real positive.

In the chart below, you can see how the company has grown earnings, and revenue, over time. For finer detail, click on the image.

While profitability drives the upside, prudent investors always check the balance sheet, too.

Are Ratos Insiders Aligned With All Shareholders?

Like the kids in the streets standing up for their beliefs, insider share purchases give me reason to believe in a brighter future. This view is based on the possibility that stock purchases signal bullishness on behalf of the buyer. However, small purchases are not always indicative of conviction, and insiders don't always get it right.

Although we did see some insider selling (worth -kr4.1m) this was overshadowed by a mountain of buying, totalling kr117m in just one year. This makes me even more interested in Ratos because it suggests that those who understand the company best, are optimistic. It is also worth noting that it was Chairman of the Board Per-Olof Soderberg who made the biggest single purchase, worth kr53m, paying kr54.75 per share.

The good news, alongside the insider buying, for Ratos bulls is that insiders (collectively) have a meaningful investment in the stock. Notably, they have an enormous stake in the company, worth kr3.4b. That equates to 20% of the company, making insiders powerful and aligned with other shareholders. Very encouraging.

Should You Add Ratos To Your Watchlist?

One important encouraging feature of Ratos is that it is growing profits. Better yet, insiders are significant shareholders, and have been buying more shares. That makes the company a prime candidate for my watchlist - and arguably a research priority. Even so, be aware that Ratos is showing 1 warning sign in our investment analysis , you should know about...

There are plenty of other companies that have insiders buying up shares. So if you like the sound of Ratos, you'll probably love this free list of growing companies that insiders are buying.

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.