Do Lyko Group's (STO:LYKO A) Earnings Warrant Your Attention?

It's only natural that many investors, especially those who are new to the game, prefer to buy shares in 'sexy' stocks with a good story, even if those businesses lose money. 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.

If, on the other hand, you like companies that have revenue, and even earn profits, then you may well be interested in Lyko Group (STO:LYKO 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 Lyko Group

Lyko Group's Improving Profits

In the last three years Lyko Group's earnings per share took off like a rocket; fast, and from a low base. So the actual rate of growth doesn't tell us much. As a result, I'll zoom in on growth over the last year, instead. It's good to see that Lyko Group's EPS have grown from kr0.63 to kr0.74 over twelve months. That's a 18% gain; respectable growth in the broader scheme of things.

I like to see top-line growth as an indication that growth is sustainable, and I look for a high earnings before interest and taxation (EBIT) margin to point to a competitive moat (though some companies with low margins also have moats). While we note Lyko Group's EBIT margins were flat over the last year, revenue grew by a solid 42% to kr1.7b. That's a real positive.

In the chart below, you can see how the company has grown earnings, and revenue, 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 Lyko Group's balance sheet strength, before getting too excited.

Are Lyko Group Insiders Aligned With All Shareholders?

Like standing at the lookout, surveying the horizon at sunrise, insider buying, for some investors, sparks joy. This view is based on the possibility that stock purchases signal bullishness on behalf of the buyer. Of course, we can never be sure what insiders are thinking, we can only judge their actions.

Insiders both bought and sold Lyko Group shares in the last year, but the good news is they spent kr389k more buying than they netted selling. When you weigh that up, it is a mild positive, indicating increased alignment between shareholders and management. We also note that it was the , Frans Gunnar Lyko, who made the biggest single acquisition, paying kr941k for shares at about kr314 each.

On top of the insider buying, we can also see that Lyko Group insiders own a large chunk of the company. Actually, with 50% of the company to their names, insiders are profoundly invested in the business. I'm always comforted by solid insider ownership like this, as it implies that those running the business are genuinely motivated to create shareholder value. And their holding is extremely valuable at the current share price, totalling kr2.4b. Now that's what I call some serious skin in the game!

While insiders are apparently happy to hold and accumulate shares, that is just part of the pretty picture. That's because on our analysis the CEO, Rickard Lyko, is paid less than the median for similar sized companies. I discovered that the median total compensation for the CEOs of companies like Lyko Group with market caps between kr1.7b and kr6.9b is about kr4.1m.

The CEO of Lyko Group only received kr1.7m in total compensation for the year ending . That's clearly well below average, so at a glance, that arrangement seems generous to shareholders, and points to a modest remuneration culture. CEO remuneration levels are not the most important metric for investors, but when the pay is modest, that does support enhanced alignment between the CEO and the ordinary shareholders. I'd also argue reasonable pay levels attest to good decision making more generally.

Does Lyko Group Deserve A Spot On Your Watchlist?

One important encouraging feature of Lyko Group is that it is growing profits. On top of that, we've seen insiders buying shares even though they already own plenty. That makes the company a prime candidate for my watchlist - and arguably a research priority. If you think Lyko Group might suit your style as an investor, you could go straight to its annual report, or you could first check our discounted cash flow (DCF) valuation for the company.

The good news is that Lyko Group 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. 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.
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