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Should You Be Adding Altium (ASX:ALU) To Your Watchlist Today?

Simply Wall St

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 completely lacks a track record of revenue and profit. Unfortunately, high risk investments often have little probability of ever paying off, and many investors pay a price to learn their lesson.

In the age of tech-stock blue-sky investing, my choice may seem old fashioned; I still prefer profitable companies like Altium (ASX:ALU). Now, I'm not saying that the stock is necessarily undervalued today; but I can't shake an appreciation for the profitability of the business itself. 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.

View our latest analysis for Altium

How Fast Is Altium Growing?

The market is a voting machine in the short term, but a weighing machine in the long term, so share price follows earnings per share (EPS) eventually. That means EPS growth is considered a real positive by most successful long-term investors. It certainly is nice to see that Altium has managed to grow EPS by 31% per year over three years. So it's not surprising to see the company trades on a very high multiple of (past) earnings.

One way to double-check a company's growth is to look at how its revenue, and earnings before interest and tax (EBIT) margins are changing. Altium shareholders can take confidence from the fact that EBIT margins are up from 34% to 36%, and revenue is growing. Ticking those two boxes is a good sign of growth, in my 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.

ASX:ALU Income Statement, December 5th 2019

While we live in the present moment at all times, there's no doubt in my mind that the future matters more than the past. So why not check this interactive chart depicting future EPS estimates, for Altium?

Are Altium Insiders Aligned With All Shareholders?

Like standing at the lookout, surveying the horizon at sunrise, insider buying, for some investors, sparks joy. 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.

We note that Altium insiders spent US$134k on stock, over the last year; in contrast, we didn't see any selling. That's nice to see, because it suggests insiders are optimistic.

On top of the insider buying, it's good to see that Altium insiders have a valuable investment in the business. Notably, they have an enormous stake in the company, worth US$531m. This suggests to me that leadership will be very mindful of shareholders' interests when making decisions!

Is Altium Worth Keeping An Eye On?

Given my belief that share price follows earnings per share you can easily imagine how I feel about Altium's strong EPS growth. On top of that, insiders own a significant stake in the company and have been buying more shares. So I do think this is one stock worth watching. Of course, profit growth is one thing but it's even better if Altium is receiving high returns on equity, since that should imply it can keep growing without much need for capital. Click on this link to see how it is faring against the average in its industry.

The good news is that Altium 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

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.