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 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.
In contrast to all that, I prefer to spend time on companies like China Xinhua Education Group (HKG:2779), which has not only revenues, but also profits. 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. 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 Xinhua Education Group Growing Its Earnings Per Share?
Even with very modest growth rates, a company will usually do well if it improves earnings per share (EPS) year after year. So EPS growth can certainly encourage an investor to take note of a stock. China Xinhua Education Group has grown its trailing twelve month EPS from CN¥0.16 to CN¥0.17, in the last year. That amounts to a small improvement of 6.4%.
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). The good news is that China Xinhua Education Group is growing revenues, and EBIT margins improved by 2.3 percentage points to 56%, over the last year. That's great to see, on both counts.
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.
The trick, as an investor, is to find companies that are going to perform well in the future, not just in the past. To that end, right now and today, you can check our visualization of consensus analyst forecasts for future China Xinhua Education Group EPS 100% free.
Are China Xinhua Education Group Insiders Aligned With All Shareholders?
Like standing at the lookout, surveying the horizon at sunrise, insider buying, for some investors, sparks joy. This view is based on the possibility that stock purchases signal bullishness on behalf of the buyer. 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 Xinhua Education Group insiders reported share sales in the last twelve months. But the really good news is that Founder & Chairman Junbao Wu spent CN¥3.0m buying stock stock, at an average price of around CN¥1.74. Big buys like that give me a sense of opportunity; actions speak louder than words.
And the insider buying isn't the only sign of alignment between shareholders and the board, since China Xinhua Education Group insiders own more than a third of the company. In fact, they own 72% 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¥2.9b. Now that's what I call some serious skin in the game!
Should You Add China Xinhua Education Group To Your Watchlist?
As I already mentioned, China Xinhua Education Group is a growing business, which is what I like to see. Better yet, insiders are significant shareholders, and have been buying more shares. That makes the company a prime candidate for my watchlist - and arguably a research priority. Now, you could try to make up your mind on China Xinhua Education Group by focusing on just these factors, or you could also consider how its price-to-earnings ratio compares to other companies in its industry.
The good news is that China Xinhua Education Group 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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