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 completely lacks a track record of revenue and profit. And in their study titled Who Falls Prey to the Wolf of Wall Street?' Leuz et. al. found that it is 'quite common' for investors to lose money by buying into 'pump and dump' schemes.
If, on the other hand, you like companies that have revenue, and even earn profits, then you may well be interested in Kinetic Mines and Energy (HKG:1277). Now, I'm not saying that the stock is necessarily undervalued today; but I can't shake an appreciation for the profitability of the business itself. 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.
Kinetic Mines and Energy's Improving Profits
In the last three years Kinetic Mines and Energy's earnings per share took off like a rocket; fast, and from a low base. So the actual rate of growth doesn't tell us much. As a result, I'll zoom in on growth over the last year, instead. Over twelve months, Kinetic Mines and Energy increased its EPS from CN¥0.089 to CN¥0.093. That amounts to a small improvement of 4.3%.
One way to double-check a company's growth is to look at how its revenue, and earnings before interest and tax (EBIT) margins are changing. On the one hand, Kinetic Mines and Energy's EBIT margins fell over the last year, but on the other hand, revenue grew. So it seems the future my hold further growth, especially if EBIT margins can stabilize.
In the chart below, you can see how the company has grown earnings, and revenue, 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 Kinetic Mines and Energy's balance sheet strength, before getting too excited.
Are Kinetic Mines and Energy 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. Because oftentimes, the purchase of stock is a sign that the buyer views it as undervalued. However, small purchases are not always indicative of conviction, and insiders don't always get it right.
One gleaming positive for Kinetic Mines and Energy, in the last year, is that a certain insider has buying shares with ample enthusiasm. In one fell swoop, Executive Chairman Li Zhang, spent HK$23m, at a price of HK$0.42 per share. Big insider buys like that are almost as rare as an ocean free of single use plastic waste.
On top of the insider buying, we can also see that Kinetic Mines and Energy insiders own a large chunk of the company. In fact, they own 74% of the company, so they will share in the same delights and challenges experienced by the ordinary shareholders. To me this is a good sign because it suggests they will be incentivised to build value for shareholders over the long term. At the current share price, that insider holding is worth a whopping CN¥2.3b. That means they have plenty of their own capital riding on the performance of the business!
While insiders already own a significant amount of shares, and they have been buying more, the good news for ordinary shareholders does not stop there. The cherry on top is that the CEO, Jianhua Gu is paid comparatively modestly to CEOs at similar sized companies. I discovered that the median total compensation for the CEOs of companies like Kinetic Mines and Energy with market caps between CN¥1.4b and CN¥5.6b is about CN¥2.3m.
The Kinetic Mines and Energy CEO received CN¥1.2m in compensation for the year ending December 2018. That seems pretty reasonable, especially given its below the median for similar sized companies. 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 a culture of integrity, in a broader sense.
Is Kinetic Mines and Energy Worth Keeping An Eye On?
One important encouraging feature of Kinetic Mines and Energy is that it is growing profits. On top of that, we've seen insiders buying shares even though they already own plenty. To me, that all makes it well worth a spot on your watchlist, as well as continuing research. Of course, profit growth is one thing but it's even better if Kinetic Mines and Energy is receiving high returns on equity, since that should imply it can keep growing without much need for capital. Click on this link to see how it is faring against the average in its industry.
There are plenty of other companies that have insiders buying up shares. So if you like the sound of Kinetic Mines and Energy, 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
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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. Simply Wall St has no position in the stocks mentioned.
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