Does Liquidity Services (NASDAQ:LQDT) Deserve A Spot On Your Watchlist?

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 as Peter Lynch said in One Up On Wall Street, 'Long shots almost never pay off.' A loss-making company is yet to prove itself with profit, and eventually the inflow of external capital may dry up.

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 Liquidity Services (NASDAQ:LQDT). Even if this company is fairly valued by the market, investors would agree that generating consistent profits will continue to provide Liquidity Services with the means to add long-term value to shareholders.

Check out our latest analysis for Liquidity Services

Liquidity Services' Improving Profits

Over the last three years, Liquidity Services 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. In impressive fashion, Liquidity Services' EPS grew from US$0.71 to US$1.82, over the previous 12 months. It's a rarity to see 157% year-on-year growth like that.

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. EBIT margins for Liquidity Services remained fairly unchanged over the last year, however the company should be pleased to report its revenue growth for the period of 13% to US$275m. That's encouraging news for the company!

The chart below shows how the company's bottom and top lines have progressed over time. To see the actual numbers, click on the chart.

Fortunately, we've got access to analyst forecasts of Liquidity Services' future profits. You can do your own forecasts without looking, or you can take a peek at what the professionals are predicting.

Are Liquidity Services Insiders Aligned With All Shareholders?

It's a necessity that company leaders act in the best interest of shareholders and so insider investment always comes as a reassurance to the market. Shareholders will be pleased by the fact that insiders own Liquidity Services shares worth a considerable sum. We note that their impressive stake in the company is worth US$138m. That equates to 24% of the company, making insiders powerful and aligned with other shareholders. Very encouraging.

Should You Add Liquidity Services To Your Watchlist?

Liquidity Services' earnings have taken off in quite an impressive fashion. That sort of growth is nothing short of eye-catching, and the large investment held by insiders should certainly brighten the view of the company. The hope is, of course, that the strong growth marks a fundamental improvement in the business economics. Based on the sum of its parts, we definitely think its worth watching Liquidity Services very closely. However, before you get too excited we've discovered 3 warning signs for Liquidity Services (2 make us uncomfortable!) that you should be aware of.

There's always the possibility of doing well buying stocks that are not growing earnings and do not have insiders buying shares. But for those who consider these important metrics, we encourage you to check out companies that do have those features. You can access a free list of them here.

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.