Do Aeorema Communications' (LON:AEO) Earnings Warrant Your Attention?
The excitement of investing in a company that can reverse its fortunes is a big draw for some speculators, so even companies that have no revenue, no profit, and a record of falling short, can manage to find investors. But as Peter Lynch said in One Up On Wall Street, 'Long shots almost never pay off.' While a well funded company may sustain losses for years, it will need to generate a profit eventually, or else investors will move on and the company will wither away.
Despite being in the age of tech-stock blue-sky investing, many investors still adopt a more traditional strategy; buying shares in profitable companies like Aeorema Communications (LON:AEO). Even if this company is fairly valued by the market, investors would agree that generating consistent profits will continue to provide Aeorema Communications with the means to add long-term value to shareholders.
View our latest analysis for Aeorema Communications
Aeorema Communications' Earnings Per Share Are Growing
The market is a voting machine in the short term, but a weighing machine in the long term, so you'd expect share price to follow earnings per share (EPS) outcomes eventually. That makes EPS growth an attractive quality for any company. It certainly is nice to see that Aeorema Communications has managed to grow EPS by 20% per year over three years. If the company can sustain that sort of growth, we'd expect shareholders to come away satisfied.
It's often helpful to take a look at earnings before interest and tax (EBIT) margins, as well as revenue growth, to get another take on the quality of the company's growth. The music to the ears of Aeorema Communications shareholders is that EBIT margins have grown from 3.6% to 6.7% in the last 12 months and revenues are on an upwards trend as well. Both of which are great metrics to check off for potential growth.
The chart below shows how the company's bottom and top lines have progressed over time. To see the actual numbers, click on the chart.
Aeorema Communications isn't a huge company, given its market capitalisation of UK£7.3m. That makes it extra important to check on its balance sheet strength.
Are Aeorema Communications Insiders Aligned With All Shareholders?
Insider interest in a company always sparks a bit of intrigue and many investors are on the lookout for companies where insiders are putting their money where their mouth is. That's because insider buying often indicates that those closest to the company have confidence that the share price will perform well. However, insiders are sometimes wrong, and we don't know the exact thinking behind their acquisitions.
Insiders in Aeorema Communications both added to and reduced their holdings over the preceding 12 months. All in all though, their acquisitions outweighed the amount of shares they sold off. At face value we can consider this a fairly encouraging sign for the company. We also note that it was the CEO & Executive Director, Steven Quah, who made the biggest single acquisition, paying UK£24k for shares at about UK£0.68 each.
And the insider buying isn't the only sign of alignment between shareholders and the board, since Aeorema Communications insiders own more than a third of the company. In fact, they own 61% of the company, so they will share in the same delights and challenges experienced by the ordinary shareholders. This should be seen as a good thing, as it means insiders have a personal interest in delivering the best outcomes for shareholders. Valued at only UK£7.3m Aeorema Communications is really small for a listed company. So this large proportion of shares owned by insiders only amounts to UK£4.4m. That might not be a huge sum but it should be enough to keep insiders motivated!
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, Steve Quah is paid comparatively modestly to CEOs at similar sized companies. For companies with market capitalisations under UK£160m, like Aeorema Communications, the median CEO pay is around UK£280k.
The Aeorema Communications CEO received UK£159k in compensation for the year ending June 2022. That comes in below the average for similar sized companies and seems pretty reasonable. While the level of CEO compensation shouldn't be the biggest factor in how the company is viewed, modest remuneration is a positive, because it suggests that the board keeps shareholder interests in mind. Generally, arguments can be made that reasonable pay levels attest to good decision-making.
Is Aeorema Communications Worth Keeping An Eye On?
If you believe that share price follows earnings per share you should definitely be delving further into Aeorema Communications' strong EPS growth. Not only that, but we can see that insiders both own a lot of, and are buying more shares in the company. Astute investors will want to keep this stock on watch. You should always think about risks though. Case in point, we've spotted 3 warning signs for Aeorema Communications you should be aware of, and 1 of them doesn't sit too well with us.
Keen growth investors love to see insider buying. Thankfully, Aeorema Communications 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.
