We Ran A Stock Scan For Earnings Growth And Advanced Drainage Systems (NYSE:WMS) Passed With Ease

It's common for many investors, especially those who are inexperienced, to buy shares in companies with a good story even if these companies are loss-making. Unfortunately, these high risk investments often have little probability of ever paying off, and many investors pay a price to learn their lesson. Loss making companies can act like a sponge for capital - so investors should be cautious that they're not throwing good money after bad.

Despite being in the age of tech-stock blue-sky investing, many investors still adopt a more traditional strategy; buying shares in profitable companies like Advanced Drainage Systems (NYSE:WMS). While this doesn't necessarily speak to whether it's undervalued, the profitability of the business is enough to warrant some appreciation - especially if its growing.

Check out the opportunities and risks within the US Building industry.

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. So it would be better to isolate the growth rate over the last year for our analysis. Impressively, Advanced Drainage Systems' EPS catapulted from US$2.65 to US$5.34, over the last year. It's a rarity to see 101% year-on-year growth like that. Shareholders will be hopeful that this is a sign of the company reaching an inflection point.

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. The music to the ears of Advanced Drainage Systems shareholders is that EBIT margins have grown from 15% to 22% in the last 12 months and revenues are on an upwards trend as well. Both of which are great metrics to check off for potential growth.

In the chart below, you can see how the company has grown earnings and revenue, over time. Click on the chart to see the exact numbers.

Of course the knack is to find stocks that have their best days in the future, not in the past. You could base your opinion on past performance, of course, but you may also want to check this interactive graph of professional analyst EPS forecasts for Advanced Drainage Systems.

Are Advanced Drainage Systems Insiders Aligned With All Shareholders?

Since Advanced Drainage Systems has a market capitalisation of US$7.9b, we wouldn't expect insiders to hold a large percentage of shares. But we are reassured by the fact they have invested in the company. Holding US$98m worth of stock in the company is no laughing matter and insiders will be committed in delivering the best outcomes for shareholders. That's certainly enough to let shareholders know that management will be very focussed on long term growth.

While it's always good to see some strong conviction in the company from insiders through heavy investment, it's also important for shareholders to ask if management compensation policies are reasonable. Well, based on the CEO pay, you'd argue that they are indeed. For companies with market capitalisations between US$4.0b and US$12b, like Advanced Drainage Systems, the median CEO pay is around US$8.1m.

Advanced Drainage Systems offered total compensation worth US$6.4m to its CEO in the year to 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. It can also be a sign of good governance, more generally.

Should You Add Advanced Drainage Systems To Your Watchlist?

Advanced Drainage Systems' earnings have taken off in quite an impressive fashion. The sweetener is that insiders have a mountain of stock, and the CEO remuneration is quite reasonable. The sharp increase in earnings could signal good business momentum. Advanced Drainage Systems certainly ticks a few boxes, so we think it's probably well worth further consideration. It's still necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Advanced Drainage Systems , and understanding these should be part of your investment process.

The beauty of investing is that you can invest in almost any company you want. But if you prefer to focus on stocks that have demonstrated insider buying, here is a list of companies 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.