- Oops!Something went wrong.Please try again later.
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 as Warren Buffett has mused, 'If you've been playing poker for half an hour and you still don't know who the patsy is, you're the patsy.' When they buy such story stocks, investors are all too often the patsy.
If, on the other hand, you like companies that have revenue, and even earn profits, then you may well be interested in China Automotive Systems (NASDAQ:CAAS). While that doesn't make the shares worth buying at any price, you can't deny that successful capitalism requires profit, eventually. Loss-making companies are always racing against time to reach financial sustainability, but time is often a friend of the profitable company, especially if it is growing.
How Fast Is China Automotive Systems Growing Its Earnings Per Share?
Over the last three years, China Automotive Systems has grown earnings per share (EPS) like young bamboo after rain; fast, and from a low base. So I don't think the percent growth rate is particularly meaningful. Thus, it makes sense to focus on more recent growth rates, instead. Like a firecracker arcing through the night sky, China Automotive Systems's EPS shot from US$0.061 to US$0.18, over the last year. You don't see 193% year-on-year growth like that, very often. That could be a sign that the business has reached a true inflection point.
I like to see top-line growth as an indication that growth is sustainable, and I look for a high earnings before interest and taxation (EBIT) margin to point to a competitive moat (though some companies with low margins also have moats). China Automotive Systems maintained stable EBIT margins over the last year, all while growing revenue 37% to US$512m. That's a real positive.
The chart below shows how the company's bottom and top lines have progressed over time. Click on the chart to see the exact numbers.
China Automotive Systems isn't a huge company, given its market capitalization of US$124m. That makes it extra important to check on its balance sheet strength.
Are China Automotive Systems Insiders Aligned With All Shareholders?
Personally, I like to see high insider ownership of a company, since it suggests that it will be managed in the interests of shareholders. So as you can imagine, the fact that China Automotive Systems insiders own a significant number of shares certainly appeals to me. Indeed, with a collective holding of 54%, 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. In terms of absolute value, insiders have US$67m invested in the business, using the current share price. That should be more than enough to keep them focussed on creating shareholder value!
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. For companies with market capitalizations under US$200m, like China Automotive Systems, the median CEO pay is around US$551k.
The CEO of China Automotive Systems only received US$220k 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 good governance, more generally.
Should You Add China Automotive Systems To Your Watchlist?
China Automotive Systems's earnings per share growth have been levitating higher, like a mountain goat scaling the Alps. 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. China Automotive Systems certainly ticks a few of my boxes, so I think it's probably well worth further consideration. It's still necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with China Automotive Systems , and understanding it should be part of your investment process.
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.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.