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 currently lacks a track record of revenue and profit. But as Peter Lynch said in One Up On Wall Street, 'Long shots almost never pay off.' A loss-making company is yet to prove itself with profit, and eventually the inflow of external capital may dry up.
If this kind of company isn't your style, you like companies that generate revenue, and even earn profits, then you may well be interested in CPS Technologies (NASDAQ:CPSH). While this doesn't necessarily speak to whether it's undervalued, the profitability of the business is enough to warrant some appreciation - especially if its growing.
CPS Technologies' 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. So a growing EPS generally brings attention to a company in the eyes of prospective investors. Commendations have to be given in seeing that CPS Technologies grew its EPS from US$0.032 to US$0.26, in one short year. When you see earnings grow that quickly, it often means good things ahead for the company. Could this be a sign that the business has reached an inflection point?
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 CPS Technologies shareholders is that EBIT margins have grown from 1.3% to 6.8% in the last 12 months and revenues are on an upwards trend as well. That's great to see, on both counts.
The chart below shows how the company's bottom and top lines have progressed over time. For finer detail, click on the image.
Since CPS Technologies is no giant, with a market capitalisation of US$43m, you should definitely check its cash and debt before getting too excited about its prospects.
Are CPS Technologies Insiders Aligned With All Shareholders?
Prior to investment, it's always a good idea to check that the management team is paid reasonably. Pay levels around or below the median, can be a sign that shareholder interests are well considered. Our analysis has discovered that the median total compensation for the CEOs of companies like CPS Technologies with market caps under US$200m is about US$767k.
CPS Technologies offered total compensation worth US$464k to its CEO in the year to December 2021. That is actually below the median for CEO's of similarly 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. Generally, arguments can be made that reasonable pay levels attest to good decision-making.
Should You Add CPS Technologies To Your Watchlist?
CPS Technologies' earnings per share growth have been climbing higher at an appreciable rate. Such fast EPS growth prompts the question: has the business reached an inflection point? What's more, the fact that the CEO's compensation is quite reasonable is a sign that the company is conscious of excessive spending. So faced with these facts, it seems that researching this stock a little more may lead you to discover an investment opportunity that meets your quality standards. However, before you get too excited we've discovered 2 warning signs for CPS Technologies (1 is a bit unpleasant!) that you should be aware of.
The beauty of investing is that you can invest in almost any company you want. But if you prefer to focus on stocks that have demonstrated insider buying, here is a list of companies 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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