Investors are often guided by the idea of discovering 'the next big thing', even if that means buying 'story stocks' without any revenue, let alone profit. But the reality is that when a company loses money each year, for long enough, its investors will usually take their share of those losses. Loss making companies can act like a sponge for capital - so investors should be cautious that they're not throwing good money after bad.
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 REV Group (NYSE:REVG). Even if this company is fairly valued by the market, investors would agree that generating consistent profits will continue to provide REV Group with the means to add long-term value to shareholders.
REV Group's Improving Profits
Strong earnings per share (EPS) results are an indicator of a company achieving solid profits, which investors look upon favourably and so the share price tends to reflect great EPS performance. Which is why EPS growth is looked upon so favourably. It's an outstanding feat for REV Group to have grown EPS from US$0.11 to US$0.34 in just one year. Even though that growth rate may not 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. While REV Group may have maintained EBIT margins over the last year, revenue has fallen. Suffice it to say that is not a great sign of growth.
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.
The trick, as an investor, is to find companies that are going to perform well in the future, not just in the past. While crystal balls don't exist, you can check our visualization of consensus analyst forecasts for REV Group's future EPS 100% free.
Are REV Group 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. That's because insider buying often indicates that those closest to the company have confidence that the share price will perform well. However, small purchases are not always indicative of conviction, and insiders don't always get it right.
First and foremost; there we saw no insiders sell REV Group shares in the last year. But the important part is that Independent Chairman of the Board Paul Bamatter spent US$759k buying stock, at an average price of US$15.17. Big buys like that may signal an opportunity; actions speak louder than words.
Along with the insider buying, another encouraging sign for REV Group is that insiders, as a group, have a considerable shareholding. Indeed, they hold US$15m worth of its stock. That's a lot of money, and no small incentive to work hard. Despite being just 2.1% of the company, the value of that investment is enough to show insiders have plenty riding on the venture.
Does REV Group Deserve A Spot On Your Watchlist?
REV Group's earnings per share have been soaring, with growth rates sky high. To sweeten the deal, insiders have significant skin in the game with one even acquiring more. These factors seem to indicate the company's potential and that it has reached an inflection point. We'd suggest REV Group belongs near the top of your watchlist. Don't forget that there may still be risks. For instance, we've identified 3 warning signs for REV Group that you should be aware of.
Keen growth investors love to see insider buying. Thankfully, REV Group isn't the only one. You can see a 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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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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