Some have more dollars than sense, they say, so even companies that have no revenue, no profit, and a record of falling short, can easily find investors. But the reality is that when a company loses money each year, for long enough, its investors will usually take their share of those losses.
In the age of tech-stock blue-sky investing, my choice may seem old fashioned; I still prefer profitable companies like China 21st Century Education Group (HKG:1598). Even if the shares are fully valued today, most capitalists would recognize its profits as the demonstration of steady value generation. 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.
How Fast Is China 21st Century Education Group Growing Its Earnings Per Share?
Even modest earnings per share growth (EPS) can create meaningful value, when it is sustained reliably from year to year. So EPS growth can certainly encourage an investor to take note of a stock. Like a falcon taking flight, China 21st Century Education Group's EPS soared from CN¥0.052 to CN¥0.074, over the last year. That's a impressive gain of 41%.
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. The good news is that China 21st Century Education Group is growing revenues, and EBIT margins improved by 5.6 percentage points to 32%, over the last year. That's great to see, on both counts.
The chart below shows how the company's bottom and top lines have progressed over time. For finer detail, click on the image.
China 21st Century Education Group isn't a huge company, given its market capitalization of HK$1.1b. That makes it extra important to check on its balance sheet strength.
Are China 21st Century Education Group Insiders Aligned With All Shareholders?
Like standing at the lookout, surveying the horizon at sunrise, insider buying, for some investors, sparks joy. 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.
The first bit of good news is that no China 21st Century Education Group insiders reported share sales in the last twelve months. But the really good news is that Chairman of the Board Yunong Li spent CN¥6.0m buying stock stock, at an average price of around CN¥0.81. To me that means at least one insider thinks that the company is doing well - and they are backing that view with cash.
And the insider buying isn't the only sign of alignment between shareholders and the board, since China 21st Century Education Group insiders own more than a third of the company. Indeed, with a collective holding of 70%, company insiders are in control and have plenty of capital behind the venture. This makes me think they will be incentivised to plan for the long term - something I like to see. With that sort of holding, insiders have about CN¥746m riding on the stock, at current prices. That's nothing to sneeze at!
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. That's because on our analysis the CEO, Hongwei Liu, is paid less than the median for similar sized companies. I discovered that the median total compensation for the CEOs of companies like China 21st Century Education Group with market caps under CN¥1.4b is about CN¥1.6m.
The CEO of China 21st Century Education Group was paid just CN¥151k in total compensation for the year ending December 2018. This could be considered a token amount, and indicates that the company does not need to use payment to motivate the CEO - that is often a good sign. 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. I'd also argue reasonable pay levels attest to good decision making more generally.
Should You Add China 21st Century Education Group To Your Watchlist?
For growth investors like me, China 21st Century Education Group's raw rate of earnings growth is a beacon in the night. The cranberry sauce on the turkey is that insiders own a bunch of shares, and one has been buying more. So it's fair to say I think this stock may well deserve a spot on your watchlist. Of course, just because China 21st Century Education Group is growing does not mean it is undervalued. If you're wondering about the valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
As a growth investor I do like to see insider buying. But China 21st Century Education Group isn't the only one. You can see a a free list of them here.
Please note the insider transactions discussed in this article refer to reportable transactions in the relevant jurisdiction
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