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Here's Why We Think Beijing Chunlizhengda Medical Instruments (HKG:1858) Is Well Worth Watching

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.'

In the age of tech-stock blue-sky investing, my choice may seem old fashioned; I still prefer profitable companies like Beijing Chunlizhengda Medical Instruments (HKG:1858). While that doesn't make the shares worth buying at any price, you can't deny that successful capitalism requires profit, eventually. 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.

Check out our latest analysis for Beijing Chunlizhengda Medical Instruments

How Quickly Is Beijing Chunlizhengda Medical Instruments Increasing Earnings Per Share?

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). That makes EPS growth an attractive quality for any company. Who among us would not applaud Beijing Chunlizhengda Medical Instruments's stratospheric annual EPS growth of 55%, compound, over the last three years? Growth that fast may well be fleeting, but like a lotus blooming from a murky pond, it sparks joy for the wary stock pickers.

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 Beijing Chunlizhengda Medical Instruments is growing revenues, and EBIT margins improved by 8.0 percentage points to 31%, over the last year. Ticking those two boxes is a good sign of growth, in my book.

In the chart below, you can see how the company has grown earnings, and revenue, over time. To see the actual numbers, click on the chart.

SEHK:1858 Income Statement May 16th 2020

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 Beijing Chunlizhengda Medical Instruments's balance sheet strength, before getting too excited.

Are Beijing Chunlizhengda Medical Instruments Insiders Aligned With All Shareholders?

Many consider high insider ownership to be a strong sign of alignment between the leaders of a company and the ordinary shareholders. So we're pleased to report that Beijing Chunlizhengda Medical Instruments insiders own a meaningful share of the business. Indeed, with a collective holding of 64%, company insiders are in control and have plenty of capital behind the venture. 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¥11b. Now that's what I call some serious skin in the game!

It means a lot to see insiders invested in the business, but I find myself wondering if remuneration policies are shareholder friendly. A brief analysis of the CEO compensation suggests they are. I discovered that the median total compensation for the CEOs of companies like Beijing Chunlizhengda Medical Instruments with market caps between CN¥7.1b and CN¥23b is about CN¥3.9m.

The CEO of Beijing Chunlizhengda Medical Instruments only received CN¥1.5m in total compensation for the year ending . That looks like modest pay to me, and may hint at a certain respect for the interests of shareholders. While the level of CEO compensation isn't a huge factor in my view of the company, 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.

Is Beijing Chunlizhengda Medical Instruments Worth Keeping An Eye On?

Beijing Chunlizhengda Medical Instruments's earnings per share have taken off like a rocket aimed right at the moon. The sweetener is that insiders have a mountain of stock, and the CEO remuneration is quite reasonable. The sharp increase in earnings could signal good business momentum. Beijing Chunlizhengda Medical Instruments certainly ticks a few of my boxes, so I think it's probably well worth further consideration. However, before you get too excited we've discovered 2 warning signs for Beijing Chunlizhengda Medical Instruments (1 is significant!) that you should be aware of.

You can invest in any company you want. But if you prefer to focus on stocks that have demonstrated insider buying, here is a list of companies 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.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.