It's common for many investors, especially those who are inexperienced, to buy shares in companies with a good story even if these companies are loss-making. Unfortunately, these high risk investments often have little probability of ever paying off, and many investors pay a price to learn their lesson. 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.
So if this idea of high risk and high reward doesn't suit, you might be more interested in profitable, growing companies, like Kinovo (LON:KINO). While profit isn't the sole metric that should be considered when investing, it's worth recognising businesses that can consistently produce it.
Kinovo's Improving Profits
Over the last three years, Kinovo 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. As a result, we'll zoom in on growth over the last year, instead. Impressively, Kinovo's EPS catapulted from UK£0.016 to UK£0.045, over the last year. Year on year growth of 187% is certainly a sight to behold.
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. The music to the ears of Kinovo shareholders is that EBIT margins have grown from 2.4% to 6.3% in the last 12 months and revenues are on an upwards trend as well. Ticking those two boxes is a good sign of growth, in our book.
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.
Since Kinovo is no giant, with a market capitalisation of UK£21m, you should definitely check its cash and debt before getting too excited about its prospects.
Are Kinovo Insiders Aligned With All Shareholders?
Investors are always searching for a vote of confidence in the companies they hold and insider buying is one of the key indicators for optimism on the market. This view is based on the possibility that stock purchases signal bullishness on behalf of the buyer. However, insiders are sometimes wrong, and we don't know the exact thinking behind their acquisitions.
The good news for Kinovo shareholders is that no insiders reported selling shares in the last year. Add in the fact that Lee Venables, the Chief Operating Officer of the company, paid UK£10.0k for shares at around UK£0.38 each. Purchases like this can help the investors understand the views of the management team; in which case they see some potential in Kinovo.
It's commendable to see that insiders have been buying shares in Kinovo, but there is more evidence of shareholder friendly management. Namely, Kinovo has a very reasonable level of CEO pay. For companies with market capitalisations under UK£162m, like Kinovo, the median CEO pay is around UK£283k.
The Kinovo CEO received UK£229k in compensation for the year ending March 2022. That seems pretty reasonable, especially given it's below the median for similar sized companies. 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 a culture of integrity, in a broader sense.
Is Kinovo Worth Keeping An Eye On?
Kinovo's earnings per share growth have been climbing higher at an appreciable rate. Better yet, we can observe insider buying and the chief executive pay looks reasonable. It could be that Kinovo is at an inflection point, given the EPS growth. If these have piqued your interest, then this stock surely warrants a spot on your watchlist. It's still necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Kinovo (at least 1 which shouldn't be ignored) , and understanding them should be part of your investment process.
The good news is that Kinovo is not the only growth stock with insider buying. Here's a list of them... 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.
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