The excitement of investing in a company that can reverse its fortunes is a big draw for some speculators, so even companies that have no revenue, no profit, and a record of falling short, can manage to find investors. Unfortunately, these high risk investments often have little probability of ever paying off, and many investors pay a price to learn their lesson. While a well funded company may sustain losses for years, it will need to generate a profit eventually, or else investors will move on and the company will wither away.
So if this idea of high risk and high reward doesn't suit, you might be more interested in profitable, growing companies, like Data#3 (ASX:DTL). Now this is not to say that the company presents the best investment opportunity around, but profitability is a key component to success in business.
How Fast Is Data#3 Growing?
If you believe that markets are even vaguely efficient, then over the long term you'd expect a company's share price to follow its earnings per share (EPS) outcomes. That makes EPS growth an attractive quality for any company. We can see that in the last three years Data#3 grew its EPS by 16% per year. That's a pretty good rate, if the company can sustain it.
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. Data#3 maintained stable EBIT margins over the last year, all while growing revenue 17% to AU$2.6b. That's progress.
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.
You don't drive with your eyes on the rear-view mirror, so you might be more interested in this free report showing analyst forecasts for Data#3's future profits.
Are Data#3 Insiders Aligned With All Shareholders?
Insider interest in a company always sparks a bit of intrigue and many investors are on the lookout for companies where insiders are putting their money where their mouth is. That's because insider buying often indicates that those closest to the company have confidence that the share price will perform well. However, insiders are sometimes wrong, and we don't know the exact thinking behind their acquisitions.
Over the last 12 months Data#3 insiders spent AU$160k more buying shares than they received from selling them. On balance, that's a good sign. It is also worth noting that it was Independent Non-Executive Director Susan Forrester who made the biggest single purchase, worth AU$100k, paying AU$7.58 per share.
The good news, alongside the insider buying, for Data#3 bulls is that insiders (collectively) have a meaningful investment in the stock. As a matter of fact, their holding is valued at AU$40m. That's a lot of money, and no small incentive to work hard. Even though that's only about 3.7% of the company, it's enough money to indicate alignment between the leaders of the business and ordinary shareholders.
Shareholders have more to smile about than just insiders adding more shares to their already sizeable holdings. That's because on our analysis the CEO, Laurence Baynham, is paid less than the median for similar sized companies. Our analysis has discovered that the median total compensation for the CEOs of companies like Data#3 with market caps between AU$632m and AU$2.5b is about AU$1.6m.
Data#3 offered total compensation worth AU$1.2m to its CEO in the year to June 2023. That seems pretty reasonable, especially given it's below the median for similar sized companies. 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. It can also be a sign of a culture of integrity, in a broader sense.
Should You Add Data#3 To Your Watchlist?
One important encouraging feature of Data#3 is that it is growing profits. On top of that, we've seen insiders buying shares even though they already own plenty. These factors alone make the company an interesting prospect for your watchlist, as well as continuing research. However, before you get too excited we've discovered 1 warning sign for Data#3 that you should be aware of.
The good news is that Data#3 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.
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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.