Bruce Rodgers took the reins as CEO of LM Funding America Inc’s (NASDAQ:LMFA) and grew market cap to US$4.25M recently. Understanding how CEOs are incentivised to run and grow their company is an important aspect of investing in a stock. Incentives can be in the form of compensation, which should always be structured in a way that promotes value-creation to shareholders. Today we will assess Rodgers’s pay and compare this to the company’s performance over the same period, as well as measure it against other US CEOs leading companies of similar size and profitability. Check out our latest analysis for LM Funding America
What has been the trend in LMFA’s earnings?
LMFA can create value to shareholders by increasing its profitability, which in turn is reflected into the share price and the investor’s ability to sell their shares at higher capital gains. Most recently, LMFA released negative earnings of -US$8.23M , which is a further decline from prior year’s loss of -US$2.34M. Moreover, on average, LMFA has been loss-making in the past, with a 5-year average EPS of -US$1.06. During times of negative earnings, the company may be going through a period of reinvestment and growth, or it can be a signal of some headwind. In any case, CEO compensation should represent the current state of the business. In the latest financial statments, Rodgers’s total compensation dropped by a non-trivial rate of -27.64%, to US$271.09K.
Is LMFA’s CEO overpaid relative to the market?
Though no standard benchmark exists, since compensation should account for specific factors of the company and market, we can determine a high-level yardstick to see if LMFA deviates substantially from its peers. This outcome helps investors ask the right question about Rodgers’s incentive alignment. Typically, a US small-cap has a value of $1B, generates earnings of $96M, and remunerates its CEO at roughly $2.7M per annum. Normally I would look at market cap and earnings as a proxy for performance, however, LMFA’s negative earnings reduces the effectiveness of this method. Looking at the range of compensation for small-cap executives, it seems like Rodgers is being paid within the bounds of reasonableness. Putting everything together, even though LMFA is loss-making, it seems like the CEO’s pay is sound.
In order to determine whether or not you should invest in LMFA, your thesis should be built on fundamentals. Even though CEO pay isn’t technically a key concern, it could serve as an indication as to how board members align incentives and how they think about setting policies. These issues directly impacts how LMFA makes money, and factors impacting your return on investment. If you have not done so already, I urge you to complete your research by taking a look at the following:
- Governance: To find out more about LMFA’s governance, look through our infographic report of the company’s board and management.
- Financial Health: Does it have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
- Other High-Growth Alternatives: Are there other high-growth stocks you could be holding instead of LMFA? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.