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 completely lacks a track record of revenue and profit. And in their study titled Who Falls Prey to the Wolf of Wall Street?' Leuz et. al. found that it is 'quite common' for investors to lose money by buying into 'pump and dump' schemes.
In contrast to all that, I prefer to spend time on companies like CLPS Incorporation (NASDAQ:CLPS), which has not only revenues, but also profits. While that doesn't make the shares worth buying at any price, you can't deny that successful capitalism requires profit, eventually. Conversely, a loss-making company is yet to prove itself with profit, and eventually the sweet milk of external capital may run sour.
How Quickly Is CLPS Incorporation Increasing Earnings Per Share?
If you believe that markets are even vaguely efficient, then over the long term you'd expect a company's share price to follow its earnings per share (EPS). Therefore, there are plenty of investors who like to buy shares in companies that are growing EPS. Impressively, CLPS Incorporation has grown EPS by 18% per year, compound, in the last three years. If the company can sustain that sort of growth, we'd expect shareholders to come away winners.
I like to take a look at earnings before interest and (EBIT) tax margins, as well as revenue growth, to get another take on the quality of the company's growth. The good news is that CLPS Incorporation is growing revenues, and EBIT margins improved by 4.4 percentage points to 3.7%, over the last year. Ticking those two boxes is a good sign of growth, in my book.
You can take a look at the company's revenue and earnings growth trend, in the chart below. To see the actual numbers, click on the chart.
CLPS Incorporation isn't a huge company, given its market capitalization of US$74m. That makes it extra important to check on its balance sheet strength.
Are CLPS Incorporation Insiders Aligned With All Shareholders?
Personally, I like to see high insider ownership of a company, since it suggests that it will be managed in the interests of shareholders. So as you can imagine, the fact that CLPS Incorporation insiders own a significant number of shares certainly appeals to me. In fact, they own 57% of the company, so they will share in the same delights and challenges experienced by the ordinary shareholders. This makes me think they will be incentivised to plan for the long term - something I like to see. In terms of absolute value, insiders have US$42m invested in the business, using the current share price. That should be more than enough to keep them focussed on creating shareholder value!
It's good to see that insiders are invested in the company, but are remuneration levels reasonable? A brief analysis of the CEO compensation suggests they are. I discovered that the median total compensation for the CEOs of companies like CLPS Incorporation with market caps under US$200m is about US$545k.
The CLPS Incorporation CEO received total compensation of just US$112k in the year to . That looks like modest pay to me, and may hint at a certain respect for the interests of shareholders. 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. It can also be a sign of a culture of integrity, in a broader sense.
Should You Add CLPS Incorporation To Your Watchlist?
Given my belief that share price follows earnings per share you can easily imagine how I feel about CLPS Incorporation's strong EPS growth. If you need more convincing beyond that EPS growth rate, don't forget about the reasonable remuneration and the high insider ownership. This may only be a fast rundown, but the takeaway for me is that CLPS Incorporation is worth keeping an eye on. Even so, be aware that CLPS Incorporation is showing 2 warning signs in our investment analysis , you should know about...
Of course, you can do well (sometimes) buying stocks that are not growing earnings and do not have insiders buying shares. But as a growth investor I always like 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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What are the risks and opportunities for CLPS Incorporation?
Price-To-Earnings ratio (7.8x) is below the US market (15.3x)
High level of non-cash earnings
Does not have a meaningful market cap ($35M)
Shareholders have been diluted in the past year
Profit margins (2.9%) are lower than last year (5.4%)
Volatile share price over the past 3 months
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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CLPS Incorporation provides information technology (IT), consulting, and solutions to institutions operating in banking, insurance, and financial sectors in the People’s Republic of China and internationally.
Adequate balance sheet and slightly overvalued.