If EPS Growth Is Important To You, Automatic Data Processing (NASDAQ:ADP) Presents An Opportunity

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 currently lacks a track record of revenue and profit. But the reality is that when a company loses money each year, for long enough, its investors will usually take their share of those losses. Loss-making companies are always racing against time to reach financial sustainability, so investors in these companies may be taking on more risk than they should.

If this kind of company isn't your style, you like companies that generate revenue, and even earn profits, then you may well be interested in Automatic Data Processing (NASDAQ:ADP). Even if this company is fairly valued by the market, investors would agree that generating consistent profits will continue to provide Automatic Data Processing with the means to add long-term value to shareholders.

Check out our latest analysis for Automatic Data Processing

How Quickly Is Automatic Data Processing Increasing Earnings Per Share?

If a company can keep growing earnings per share (EPS) long enough, its share price should eventually follow. So it makes sense that experienced investors pay close attention to company EPS when undertaking investment research. Automatic Data Processing managed to grow EPS by 10% per year, over three years. That growth rate is fairly good, assuming the company can keep it up.

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. Not all of Automatic Data Processing's revenue this year is revenue from operations, so keep in mind the revenue and margin numbers used in this article might not be the best representation of the underlying business. Automatic Data Processing maintained stable EBIT margins over the last year, all while growing revenue 9.9% to US$17b. That's a real positive.

The chart below shows how the company's bottom and top lines have progressed over time. For finer detail, click on the image.

You don't drive with your eyes on the rear-view mirror, so you might be more interested in this free report showing analyst forecasts for Automatic Data Processing's future profits.

Are Automatic Data Processing Insiders Aligned With All Shareholders?

We would not expect to see insiders owning a large percentage of a US$90b company like Automatic Data Processing. But thanks to their investment in the company, it's pleasing to see that there are still incentives to align their actions with the shareholders. We note that their impressive stake in the company is worth US$106m. While that is a lot of skin in the game, we note this holding only totals to 0.1% of the business, which is a result of the company being so large. This still shows shareholders there is a degree of alignment between management and themselves.

It's good to see that insiders are invested in the company, but are remuneration levels reasonable? Our quick analysis into CEO remuneration would seem to indicate they are. The median total compensation for CEOs of companies similar in size to Automatic Data Processing, with market caps over US$8.0b, is around US$13m.

Automatic Data Processing's CEO took home a total compensation package worth US$6.9m in the year leading up to June 2022. That comes in below the average for similar sized companies and seems pretty reasonable. While the level of CEO compensation shouldn't be the biggest factor in how the company is viewed, modest remuneration is a positive, because it suggests that the board keeps shareholder interests in mind. It can also be a sign of a culture of integrity, in a broader sense.

Is Automatic Data Processing Worth Keeping An Eye On?

As previously touched on, Automatic Data Processing is a growing business, which is encouraging. The fact that EPS is growing is a genuine positive for Automatic Data Processing, but the pleasant picture gets better than that. With a meaningful level of insider ownership, and reasonable CEO pay, a reasonable mind might conclude that this is one stock worth watching. It is worth noting though that we have found 1 warning sign for Automatic Data Processing that you need to take into consideration.

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.