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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.' Loss making companies can act like a sponge for capital - so investors should be cautious that they're not throwing good money after bad.
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 Australian Agricultural (ASX:AAC). While profit isn't the sole metric that should be considered when investing, it's worth recognising businesses that can consistently produce it.
How Fast Is Australian Agricultural Growing Its Earnings Per Share?
Over the last three years, Australian Agricultural has grown earnings per share (EPS) at as impressive rate from a relatively low point, resulting in a three year percentage growth rate that isn't particularly indicative of expected future performance. As a result, we'll zoom in on growth over the last year, instead. Outstandingly, Australian Agricultural's EPS shot from AU$0.076 to AU$0.23, over the last year. It's not often a company can achieve year-on-year growth of 198%.
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. On the revenue front, Australian Agricultural has done well over the past year, growing revenue by 4.0% to AU$276m but EBIT margin figures were less stellar, seeing a decline over the last 12 months. So if EBIT margins can stabilize, this top-line growth should pay off for shareholders.
The chart below shows how the company's bottom and top lines have progressed over time. Click on the chart to see the exact numbers.
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 Australian Agricultural's balance sheet strength, before getting too excited.
Are Australian Agricultural 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. That's because insider buying often indicates that those closest to the company have confidence that the share price will perform well. Of course, we can never be sure what insiders are thinking, we can only judge their actions.
One shining light for Australian Agricultural is the serious outlay one insider has made to buy shares, in the last year. Specifically, in one large transaction company insider John Andrew Forrest paid AU$35m, for stock at AU$1.11 per share. Seeing such high conviction in the company is a huge positive for shareholders and should instil confidence in their mission.
On top of the insider buying, we can also see that Australian Agricultural insiders own a large chunk of the company. Indeed, with a collective holding of 67%, company insiders are in control and have plenty of capital behind the venture. This should be seen as a good thing, as it means insiders have a personal interest in delivering the best outcomes for shareholders. at the current share price. That level of investment from insiders is nothing to sneeze at.
Shareholders have more to smile about than just insiders adding more shares to their already sizeable holdings. That's because Australian Agricultural's CEO, Dave Harris, is paid at a relatively modest level when compared to other CEOs for companies of this size. Our analysis has discovered that the median total compensation for the CEOs of companies like Australian Agricultural with market caps between AU$580m and AU$2.3b is about AU$1.5m.
Australian Agricultural's CEO took home a total compensation package of AU$731k in the year prior to March 2022. That looks like a modest pay packet, 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.
Should You Add Australian Agricultural To Your Watchlist?
Australian Agricultural's earnings have taken off in quite an impressive fashion. The icing on the cake is that insiders own a large chunk of the company and one has even been buying more shares. These factors seem to indicate the company's potential and that it has reached an inflection point. We'd suggest Australian Agricultural belongs near the top of your watchlist. We don't want to rain on the parade too much, but we did also find 2 warning signs for Australian Agricultural (1 is significant!) that you need to be mindful of.
There are plenty of other companies that have insiders buying up shares. So if you like the sound of Australian Agricultural, you'll probably love this free list of growing companies that insiders are buying.
Please note the insider transactions discussed in this article refer to reportable transactions in the relevant jurisdiction.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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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