Like a puppy chasing its tail, some new investors often chase 'the next big thing', even if that means buying 'story stocks' without 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.
In the age of tech-stock blue-sky investing, my choice may seem old fashioned; I still prefer profitable companies like XRF Scientific (ASX:XRF). Even if the shares are fully valued today, most capitalists would recognize its profits as the demonstration of steady value generation. While a well funded company may sustain losses for years, unless its owners have an endless appetite for subsidizing the customer, it will need to generate a profit eventually, or else breathe its last breath.
How Fast Is XRF Scientific 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). It's no surprise, then, that I like to invest in companies with EPS growth. Who among us would not applaud XRF Scientific's stratospheric annual EPS growth of 51%, compound, over the last three years? Growth that fast may well be fleeting, but like a lotus blooming from a murky pond, it sparks joy for the wary stock pickers.
I like to take a look at earnings before interest and (EBIT) tax margins, as well as revenue growth, to get another take on the quality of the company's growth. The good news is that XRF Scientific is growing revenues, and EBIT margins improved by 5.4 percentage points to 21%, over the last year. That's great to see, on both counts.
In the chart below, you can see how the company has grown earnings, and revenue, over time. To see the actual numbers, click on the chart.
Since XRF Scientific is no giant, with a market capitalization of AU$90m, so you should definitely check its cash and debt before getting too excited about its prospects.
Are XRF Scientific Insiders Aligned With All Shareholders?
Like the kids in the streets standing up for their beliefs, insider share purchases give me reason to believe in a brighter future. Because oftentimes, 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.
Over the last 12 months XRF Scientific insiders spent AU$95k more buying shares than they received from selling them. On balance, that's a good sign. It is also worth noting that it was Non-Executive Director David Brown who made the biggest single purchase, worth AU$137k, paying AU$0.65 per share.
Along with the insider buying, another encouraging sign for XRF Scientific is that insiders, as a group, have a considerable shareholding. Indeed, they hold AU$20m worth of its stock. That shows significant buy-in, and may indicate conviction in the business strategy. Those holdings account for over 23% of the company; visible skin in the game.
While insiders already own a significant amount of shares, and they have been buying more, the good news for ordinary shareholders does not stop there. The cherry on top is that the CEO, Vance Stazzonelli is paid comparatively modestly to CEOs at similar sized companies. For companies with market capitalizations under AU$283m, like XRF Scientific, the median CEO pay is around AU$410k.
XRF Scientific offered total compensation worth AU$365k to its CEO in the year to . That seems pretty reasonable, especially given its below the median for similar sized companies. 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. I'd also argue reasonable pay levels attest to good decision making more generally.
Should You Add XRF Scientific To Your Watchlist?
XRF Scientific's earnings have taken off like any random crypto-currency did, back in 2017. What's more insiders own a significant stake in the company and have been buying more shares. Because of the potential that it has reached an inflection point, I'd suggest XRF Scientific belongs on the top of your watchlist. Even so, be aware that XRF Scientific is showing 2 warning signs in our investment analysis , you should know about...
As a growth investor I do like to see insider buying. But XRF Scientific 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.