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Does Valmec (ASX:VMX) Deserve A Spot On Your Watchlist?

Simply Wall St

Like a puppy chasing its tail, some new investors often chase 'the next big thing', even if that means buying 'story stocks' without revenue, let alone profit. But as Peter Lynch said in One Up On Wall Street, 'Long shots almost never pay off.'

If, on the other hand, you like companies that have revenue, and even earn profits, then you may well be interested in Valmec (ASX:VMX). While profit is not necessarily a social good, it's easy to admire a business that can consistently produce it. While a well funded company may sustain losses for years, unless its owners have an endless appetite for subsidizing the customer, it will need to generate a profit eventually, or else breathe its last breath.

See our latest analysis for Valmec

How Fast Is Valmec Growing?

As one of my mentors once told me, share price follows earnings per share (EPS). That means EPS growth is considered a real positive by most successful long-term investors. Impressively, Valmec has grown EPS by 28% per year, compound, in the last three years. If the company can sustain that sort of growth, we'd expect shareholders to come away winners.

I like to take a look at earnings before interest and (EBIT) tax margins, as well as revenue growth, to get another take on the quality of the company's growth. The good news is that Valmec is growing revenues, and EBIT margins improved by 3.6 percentage points to 5.6%, over the last year. Ticking those two boxes is a good sign of growth, in my book.

You can take a look at the company's revenue and earnings growth trend, in the chart below. Click on the chart to see the exact numbers.

earnings-and-revenue-history
earnings-and-revenue-history

Valmec isn't a huge company, given its market capitalization of AU$20m. That makes it extra important to check on its balance sheet strength.

Are Valmec Insiders Aligned With All Shareholders?

Like the kids in the streets standing up for their beliefs, insider share purchases give me reason to believe in a brighter future. That's because insider buying often indicates that those closest to the company have confidence that the share price will perform well. However, small purchases are not always indicative of conviction, and insiders don't always get it right.

We note that Valmec insiders spent AU$218k on stock, over the last year; in contrast, we didn't see any selling. That puts the company in a nice light, as it makes me think its leaders are feeling confident. It is also worth noting that it was Non-Executive Director Stephen Lazarakis who made the biggest single purchase, worth AU$52k, paying AU$0.26 per share.

On top of the insider buying, we can also see that Valmec insiders own a large chunk of the company. In fact, they own 50% of the shares, making insiders a very influential shareholder group. I'm reassured by this kind of alignment, as it suggests the business will be run for the benefit of shareholders. Of course, Valmec is a very small company, with a market cap of only AU$20m. So despite a large proportional holding, insiders only have AU$10m worth of stock. That might not be a huge sum but it should be enough to keep insiders motivated!

Should You Add Valmec To Your Watchlist?

For growth investors like me, Valmec's raw rate of earnings growth is a beacon in the night. On top of that, insiders own a significant stake in the company and have been buying more shares. So I do think this is one stock worth watching. It's still necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Valmec (at least 1 which shouldn't be ignored) , and understanding them should be part of your investment process.

There are plenty of other companies that have insiders buying up shares. So if you like the sound of Valmec, 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.

This article by Simply Wall St is general in nature. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.