Do MGE Energy's (NASDAQ:MGEE) Earnings Warrant Your Attention?

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.' 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 MGE Energy (NASDAQ:MGEE). 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.

See our latest analysis for MGE Energy

MGE Energy's Earnings Per Share Are Growing

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) outcomes. Therefore, there are plenty of investors who like to buy shares in companies that are growing EPS. We can see that in the last three years MGE Energy grew its EPS by 5.7% per year. This may not be setting the world alight, but it does show that EPS is on the upwards trend.

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. MGE Energy's EBIT margins have actually improved by 2.3 percentage points in the last year, to reach 24%, but, on the flip side, revenue was down 8.5%. That's not a good look.

You can take a look at the company's revenue and earnings growth trend, in the chart below. For finer detail, click on the image.

While it's always good to see growing profits, you should always remember that a weak balance sheet could come back to bite. So check MGE Energy's balance sheet strength, before getting too excited.

Are MGE Energy Insiders Aligned With All Shareholders?

Insider interest in a company always sparks a bit of intrigue and many investors are on the lookout for companies where insiders are putting their money where their mouth is. Because often, the purchase of stock is a sign that the buyer views it as undervalued. However, insiders are sometimes wrong, and we don't know the exact thinking behind their acquisitions.

Not only did MGE Energy insiders refrain from selling stock during the year, but they also spent US$89k buying it. This is a good look for the company as it paints an optimistic picture for the future.

It's commendable to see that insiders have been buying shares in MGE Energy, but there is more evidence of shareholder friendly management. Namely, MGE Energy has a very reasonable level of CEO pay. For companies with market capitalisations between US$2.0b and US$6.4b, like MGE Energy, the median CEO pay is around US$6.7m.

MGE Energy's CEO took home a total compensation package of US$2.6m in the year prior to December 2023. That looks like a modest pay packet, 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 good governance, more generally.

Is MGE Energy Worth Keeping An Eye On?

As previously touched on, MGE Energy is a growing business, which is encouraging. And there's more to MGE Energy, with the insider buying and modest CEO pay being a great look for those with an eye on the company. If these factors aren't enough to secure MGE Energy a spot on the watchlist, then it certainly warrants a closer look at the very least. We don't want to rain on the parade too much, but we did also find 2 warning signs for MGE Energy that you need to be mindful of.

The good news is that MGE Energy is not the only stock with insider buying. Here's a list of small cap, undervalued companies in the US 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.