Should You Be Adding African Rainbow Minerals (JSE:ARI) To Your Watchlist Today?

The excitement of investing in a company that can reverse its fortunes is a big draw for some speculators, so even companies that have no revenue, no profit, and a record of falling short, can manage to find investors. But as Peter Lynch said in One Up On Wall Street, 'Long shots almost never pay off.' While a well funded company may sustain losses for years, it will need to generate a profit eventually, or else investors will move on and the company will wither away.

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 African Rainbow Minerals (JSE:ARI). 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.

Check out our latest analysis for African Rainbow Minerals

How Fast Is African Rainbow Minerals Growing?

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. To the delight of shareholders, African Rainbow Minerals has achieved impressive annual EPS growth of 40%, compound, over the last three years. While that sort of growth rate isn't sustainable for long, it certainly catches the eye of prospective investors.

It's often helpful to take a look at earnings before interest and tax (EBIT) margins, as well as revenue growth, to get another take on the quality of the company's growth. The good news is that African Rainbow Minerals is growing revenues, and EBIT margins improved by 10.3 percentage points to 53%, over the last year. Ticking those two boxes is a good sign of growth, in our 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.

While we live in the present moment, there's little doubt that the future matters most in the investment decision process. So why not check this interactive chart depicting future EPS estimates, for African Rainbow Minerals?

Are African Rainbow Minerals 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. African Rainbow Minerals followers will find comfort in knowing that insiders have a significant amount of capital that aligns their best interests with the wider shareholder group. Indeed, they hold R230m worth of its stock. This considerable investment should help drive long-term value in the business. Even though that's only about 0.6% of the company, it's enough money to indicate alignment between the leaders of the business and ordinary shareholders.

While it's always good to see some strong conviction in the company from insiders through heavy investment, it's also important for shareholders to ask if management compensation policies are 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 African Rainbow Minerals, with market caps between R33b and R105b, is around R24m.

African Rainbow Minerals' CEO took home a total compensation package worth R19m in the year leading up to June 2021. That comes in below the average for similar sized companies and seems pretty reasonable. CEO compensation is hardly the most important aspect of a company to consider, but when it's reasonable, that gives a little more confidence that leadership are looking out for shareholder interests. It can also be a sign of good governance, more generally.

Should You Add African Rainbow Minerals To Your Watchlist?

African Rainbow Minerals' earnings have taken off in quite an impressive fashion. 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. African Rainbow Minerals is certainly doing some things right and is well worth investigating. We should say that we've discovered 2 warning signs for African Rainbow Minerals that you should be aware of before investing here.

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.