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Should You Be Adding Phoslock Environmental Technologies (ASX:PET) To Your Watchlist Today?

Simply Wall St

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 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.

So if you're like me, you might be more interested in profitable, growing companies, like Phoslock Environmental Technologies (ASX:PET). 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. Conversely, a loss-making company is yet to prove itself with profit, and eventually the sweet milk of external capital may run sour.

View our latest analysis for Phoslock Environmental Technologies

How Fast Is Phoslock Environmental Technologies Growing Its Earnings Per Share?

In business, though not in life, profits are a key measure of success; and share prices tend to reflect earnings per share (EPS). So like the hint of a smile on a face that I love, growing EPS generally makes me look twice. It is therefore awe-striking that Phoslock Environmental Technologies's EPS went from AU$0.000002 to AU$0.00067 in just one year. When you see earnings grow that quickly, it often means good things ahead for the company.

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 we note Phoslock Environmental Technologies's EBIT margins were flat over the last year, revenue grew by a solid 20% to AU$19m. That's progress.

You can take a look at the company's revenue and earnings growth trend, in the chart below. Click on the chart to see the exact numbers.

ASX:PET Income Statement, August 23rd 2019

While it's always good to see growing profits, you should always remember that a weak balance sheet could come back to bite. So check Phoslock Environmental Technologies's balance sheet strength, before getting too excited.

Are Phoslock Environmental Technologies Insiders Aligned With All Shareholders?

It makes me feel more secure owning shares in a company if insiders also own shares, thusly more closely aligning our interests. As a result, I'm encouraged by the fact that insiders own Phoslock Environmental Technologies shares worth a considerable sum. Indeed, they have a glittering mountain of wealth invested in it, currently valued at AU$266m. Coming in at 34% of the business, that holding gives insiders a lot of influence, and plenty of reason to generate value for shareholders. So it might be my imagination, but I do sense the glimmer of an opportunity.

Does Phoslock Environmental Technologies Deserve A Spot On Your Watchlist?

Phoslock Environmental Technologies's earnings have taken off like any random crypto-currency did, back in 2017. That EPS growth certainly has my attention, and the large insider ownership only serves to further stoke my interest. The hope is, of course, that the strong growth marks a fundamental improvement in the business economics. So yes, on this short analysis I do think it's worth considering Phoslock Environmental Technologies for a spot on your watchlist. One of Buffett's considerations when discussing businesses is if they are capital light or capital intensive. Generally, a company with a high return on equity is capital light, and can thus fund growth more easily. So you might want to check this graph comparing Phoslock Environmental Technologies's ROE with industry peers (and the market at large).

You can invest in 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

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.

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. Thank you for reading.