Do CPS Technologies's (NASDAQ:CPSH) Earnings Warrant Your Attention?

April 22, 2022
  •  Updated
September 18, 2022
NasdaqCM:CPSH
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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. But as Warren Buffett has mused, 'If you've been playing poker for half an hour and you still don't know who the patsy is, you're the patsy.' When they buy such story stocks, investors are all too often the patsy.

In contrast to all that, I prefer to spend time on companies like CPS Technologies (NASDAQ:CPSH), which has not only revenues, but also profits. Even if the shares are fully valued today, most capitalists would recognize its profits as the demonstration of steady value generation. Conversely, a loss-making company is yet to prove itself with profit, and eventually the sweet milk of external capital may run sour.

View our latest analysis for CPS Technologies

How Fast Is CPS Technologies Growing Its Earnings Per Share?

In business, though not in life, profits are a key measure of success; and share prices tend to reflect earnings per share (EPS). So like a ray of sunshine through a gap in the clouds, improving EPS is considered a good sign. You can imagine, then, that it almost knocked my socks off when I realized that CPS Technologies grew its EPS from US$0.069 to US$0.22, in one short year. Even though that growth rate is unlikely to be repeated, that looks like a breakout improvement.

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. CPS Technologies maintained stable EBIT margins over the last year, all while growing revenue 7.5% to US$22m. That's progress.

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.

earnings-and-revenue-history
NasdaqCM:CPSH Earnings and Revenue History April 22nd 2022

Since CPS Technologies is no giant, with a market capitalization of US$56m, so you should definitely check its cash and debt before getting too excited about its prospects.

Are CPS Technologies Insiders Aligned With All Shareholders?

I like company leaders to have some skin in the game, so to speak, because it increases alignment of incentives between the people running the business, and its true owners. So it is good to see that CPS Technologies insiders have a significant amount of capital invested in the stock. To be specific, they have US$12m worth of shares. That's a lot of money, and no small incentive to work hard. Those holdings account for over 22% of the company; visible skin in the game.

It's good to see that insiders are invested in the company, but are remuneration levels reasonable? Well, based on the CEO pay, I'd say they are indeed. For companies with market capitalizations under US$200m, like CPS Technologies, the median CEO pay is around US$680k.

The CPS Technologies CEO received US$464k in compensation for the year ending . That seems pretty reasonable, especially given its below the median for similar sized companies. CEO compensation is hardly the most important aspect of a company to consider, but when its reasonable that does give me a little more confidence that leadership are looking out for shareholder interests. I'd also argue reasonable pay levels attest to good decision making more generally.

Does CPS Technologies Deserve A Spot On Your Watchlist?

CPS Technologies's earnings per share have taken off like a rocket aimed right at the moon. The cherry on top is that insiders own a bucket-load of shares, and the CEO pay seems really quite reasonable. The sharp increase in earnings could signal good business momentum. Big growth can make big winners, so I do think CPS Technologies is worth considering carefully. You should always think about risks though. Case in point, we've spotted 4 warning signs for CPS Technologies you should be aware of, and 1 of them is a bit unpleasant.

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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