Here's Why Advanced Drainage Systems (NYSE:WMS) Has Caught The Eye Of Investors

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. Sometimes these stories can cloud the minds of investors, leading them to invest with their emotions rather than on the merit of good company fundamentals. Loss making companies can act like a sponge for capital - so investors should be cautious that they're not throwing good money after bad.

So if this idea of high risk and high reward doesn't suit, you might be more interested in profitable, growing companies, like Advanced Drainage Systems (NYSE:WMS). Now this is not to say that the company presents the best investment opportunity around, but profitability is a key component to success in business.

View our latest analysis for Advanced Drainage Systems

How Fast Is Advanced Drainage Systems Growing Its Earnings Per Share?

Over the last three years, Advanced Drainage Systems 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. Outstandingly, Advanced Drainage Systems' EPS shot from US$2.90 to US$5.68, over the last year. Year on year growth of 96% is certainly a sight to behold.

Top-line growth is a great indicator that growth is sustainable, and combined with a high earnings before interest and taxation (EBIT) margin, it's a great way for a company to maintain a competitive advantage in the market. The good news is that Advanced Drainage Systems is growing revenues, and EBIT margins improved by 8.2 percentage points to 23%, over the last year. Ticking those two boxes is a good sign of growth, in our book.

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

The trick, as an investor, is to find companies that are going to perform well in the future, not just in the past. While crystal balls don't exist, you can check our visualization of consensus analyst forecasts for Advanced Drainage Systems' future EPS 100% free.

Are Advanced Drainage Systems Insiders Aligned With All Shareholders?

We would not expect to see insiders owning a large percentage of a US$6.2b company like Advanced Drainage Systems. But we are reassured by the fact they have invested in the company. Holding US$77m worth of stock in the company is no laughing matter and insiders will be committed in delivering the best outcomes for shareholders. This should keep them focused on creating long term value for shareholders.

It's good to see that insiders are invested in the company, but are remuneration levels reasonable? Well, based on the CEO pay, you'd argue that they are indeed. Our analysis has discovered that the median total compensation for the CEOs of companies like Advanced Drainage Systems with market caps between US$4.0b and US$12b is about US$8.6m.

The Advanced Drainage Systems CEO received US$6.4m in compensation for the year ending March 2022. That is actually below the median for CEO's of similarly sized companies. CEO compensation is hardly the most important aspect of a company to consider, but when it's reasonable, that gives a little more confidence that leadership are looking out for shareholder interests. Generally, arguments can be made that reasonable pay levels attest to good decision-making.

Does Advanced Drainage Systems Deserve A Spot On Your Watchlist?

Advanced Drainage Systems' earnings have taken off in quite an impressive fashion. An added bonus for those interested is that management hold a heap of stock and the CEO pay is quite reasonable, illustrating good cash management. The strong EPS improvement suggests the businesses is humming along. Advanced Drainage Systems is certainly doing some things right and is well worth investigating. It is worth noting though that we have found 3 warning signs for Advanced Drainage Systems that you need to take into consideration.

Although Advanced Drainage Systems certainly looks good, it may appeal to more investors if insiders were buying up shares. If you like to see insider buying, then this free list of growing companies that insiders are buying, could be exactly what you're looking for.

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.