Do Cogstate's (ASX:CGS) Earnings Warrant Your Attention?
It's common for many investors, especially those who are inexperienced, to buy shares in companies with a good story even if these companies are loss-making. Unfortunately, these high risk investments often have little probability of ever paying off, and many investors pay a price to learn their lesson. A loss-making company is yet to prove itself with profit, and eventually the inflow of external capital may dry up.
So if this idea of high risk and high reward doesn't suit, you might be more interested in profitable, growing companies, like Cogstate (ASX:CGS). While profit isn't the sole metric that should be considered when investing, it's worth recognising businesses that can consistently produce it.
See our latest analysis for Cogstate
How Fast Is Cogstate Growing Its Earnings Per Share?
In the last three years Cogstate's earnings per share took off; so much so that it's a bit disingenuous to use these figures to try and deduce long term estimates. So it would be better to isolate the growth rate over the last year for our analysis. Cogstate's EPS shot up from US$0.021 to US$0.032; a result that's bound to keep shareholders happy. That's a impressive gain of 50%.
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. Cogstate reported flat revenue and EBIT margins over the last year. That's not a major concern but nor does it point to the long term growth we like to see.
You can take a look at the company's revenue and earnings growth trend, in the chart below. For finer detail, click on the image.
Cogstate isn't a huge company, given its market capitalisation of AU$231m. That makes it extra important to check on its balance sheet strength.
Are Cogstate Insiders Aligned With All Shareholders?
Investors are always searching for a vote of confidence in the companies they hold and insider buying is one of the key indicators for optimism on the market. This view is based on the possibility that stock purchases signal bullishness on behalf of the buyer. Of course, we can never be sure what insiders are thinking, we can only judge their actions.
The good news for Cogstate shareholders is that no insiders reported selling shares in the last year. So it's definitely nice that Independent Non-Executive Director Richard Mohs bought US$21k worth of shares at an average price of around US$1.72. It seems that at least one insider is prepared to show the market there is potential within Cogstate.
And the insider buying isn't the only sign of alignment between shareholders and the board, since Cogstate insiders own more than a third of the company. Actually, with 50% of the company to their names, insiders are profoundly invested in the business. Those who are comforted by solid insider ownership like this should be happy, as it implies that those running the business are genuinely motivated to create shareholder value. To give you an idea, the value of insiders' holdings in the business are valued at US$115m at the current share price. So there's plenty there to keep them focused!
Does Cogstate Deserve A Spot On Your Watchlist?
For growth investors, Cogstate's raw rate of earnings growth is a beacon in the night. Moreover, the management and board of the company hold a significant stake in the company, with one party adding to this total. These things considered, this is one stock worth watching. You should always think about risks though. Case in point, we've spotted 2 warning signs for Cogstate you should be aware of.
Keen growth investors love to see insider buying. Thankfully, Cogstate isn't the only one. You can see a a curated list of Australian companies which have exhibited consistent growth accompanied by recent insider buying.
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.
