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. Sometimes these stories can cloud the minds of investors, leading them to invest with their emotions rather than on the merit of good company fundamentals. 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 Inchcape (LON:INCH). Even if this company is fairly valued by the market, investors would agree that generating consistent profits will continue to provide Inchcape with the means to add long-term value to shareholders.
Inchcape's Improving Profits
In business, profits are a key measure of success; and share prices tend to reflect earnings per share (EPS) performance. So a growing EPS generally brings attention to a company in the eyes of prospective investors. It's an outstanding feat for Inchcape to have grown EPS from UK£0.12 to UK£0.68 in just one year. While it's difficult to sustain growth at that level, it bodes well for the company's outlook for the future.
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 good news is that Inchcape is growing revenues, and EBIT margins improved by 5.3 percentage points to 4.6%, over the last year. That's great to see, on both counts.
You can take a look at the company's revenue and earnings growth trend, in the chart below. To see the actual numbers, click on the chart.
Of course the knack is to find stocks that have their best days in the future, not in the past. You could base your opinion on past performance, of course, but you may also want to check this interactive graph of professional analyst EPS forecasts for Inchcape.
Are Inchcape 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. However, small purchases are not always indicative of conviction, and insiders don't always get it right.
In the last twelve months Inchcape insiders spent UK£9.1k on stock; good news for shareholders. While this investment may be modest, it is great considering the lack of insider selling.
On top of the insider buying, it's good to see that Inchcape insiders have a valuable investment in the business. Given insiders own a significant chunk of shares, currently valued at UK£58m, they have plenty of motivation to push the business to succeed. This would indicate that the goals of shareholders and management are one and the same.
While insiders are apparently happy to hold and accumulate shares, that is just part of the big picture. The cherry on top is that the CEO, Duncan Tait is paid comparatively modestly to CEOs at similar sized companies. The median total compensation for CEOs of companies similar in size to Inchcape, with market caps between UK£1.7b and UK£5.4b, is around UK£2.6m.
Inchcape offered total compensation worth UK£2.1m to its CEO in the year to December 2021. 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 Inchcape Worth Keeping An Eye On?
Inchcape's earnings per share growth have been climbing higher at an appreciable rate. Just as heartening; insiders both own and are buying more stock. These factors seem to indicate the company's potential and that it has reached an inflection point. We'd suggest Inchcape belongs near the top of your watchlist. It's still necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Inchcape , and understanding these should be part of your investment process.
The good news is that Inchcape is not the only growth stock with insider buying. Here's a list of them... 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.
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.
Join A Paid User Research Session
You’ll receive a US$30 Amazon Gift card for 1 hour of your time while helping us build better investing tools for the individual investors like yourself. Sign up here