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. But as Warren Buffett has mused, 'If you've been playing poker for half an hour and you still don't know who the patsy is, you're the patsy.' When they buy such story stocks, investors are all too often the patsy.
In contrast to all that, I prefer to spend time on companies like Beijing Tong Ren Tang Chinese Medicine (HKG:3613), which has not only revenues, but also profits. While profit is not necessarily a social good, it's easy to admire a business than can consistently produce it. 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.
Beijing Tong Ren Tang Chinese Medicine's Earnings Per Share Are Growing.
As one of my mentors once told me, share price follows earnings per share (EPS). That makes EPS growth an attractive quality for any company. We can see that in the last three years Beijing Tong Ren Tang Chinese Medicine grew its EPS by 16% per year. That's a good rate of growth, if it can be sustained.
I like to see top-line growth as an indication that growth is sustainable, and I look for a high earnings before interest and taxation (EBIT) margin to point to a competitive moat (though some companies with low margins also have moats). Beijing Tong Ren Tang Chinese Medicine maintained stable EBIT margins over the last year, all while growing revenue 12% to HK$1.6b. That's a real positive.
In the chart below, you can see how the company has grown earnings, and revenue, over time. For finer detail, click on the image.
Fortunately, we've got access to analyst forecasts of Beijing Tong Ren Tang Chinese Medicine's future profits. You can do your own forecasts without looking, or you can take a peek at what the professionals are predicting.
Are Beijing Tong Ren Tang Chinese Medicine Insiders Aligned With All Shareholders?
Like that fresh smell in the air when the rains are coming, insider buying fills me with optimistic anticipation. Because oftentimes, the purchase of stock is a sign that the buyer views it as undervalued. However, small purchases are not always indicative of conviction, and insiders don't always get it right.
The good news for Beijing Tong Ren Tang Chinese Medicine shareholders is that no insiders reported selling shares in the last year. With that in mind, it's heartening that Yong Ding, the Chairman of the company, paid HK$373k for shares at around HK$12.44 each.
It's me that Beijing Tong Ren Tang Chinese Medicine insiders are buying the stock, but that's not the only reason to think leader are fair to shareholders. Specifically, the CEO is paid quite reasonably for a company of this size. For companies with market capitalizations between HK$7.8b and HK$25b, like Beijing Tong Ren Tang Chinese Medicine, the median CEO pay is around HK$3.8m.
The Beijing Tong Ren Tang Chinese Medicine CEO received total compensation of just HK$1.7m in the year to December 2018. That looks like modest pay to me, and may hint at a certain respect for the interests of shareholders. 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. It can also be a sign of good governance, more generally.
Is Beijing Tong Ren Tang Chinese Medicine Worth Keeping An Eye On?
One important encouraging feature of Beijing Tong Ren Tang Chinese Medicine is that it is growing profits. And that's not all, folks. We've also seen insiders buying stock, and noted modest executive pay. If that doesn't automatically earn it a spot on your watchlist then I'd posit it warrants a closer look at the very least. If you think Beijing Tong Ren Tang Chinese Medicine might suit your style as an investor, you could go straight to its annual report, or you could first check our discounted cash flow (DCF) valuation for the company.
The good news is that Beijing Tong Ren Tang Chinese Medicine 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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