For beginners, it can seem like a good idea (and an exciting prospect) to buy a company that tells a good story to investors, even if it completely lacks a track record of revenue and profit. 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 contrast to all that, I prefer to spend time on companies like First Capital (NASDAQ:FCAP), 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 First Capital Growing?
The market is a voting machine in the short term, but a weighing machine in the long term, so share price follows earnings per share (EPS) eventually. That means EPS growth is considered a real positive by most successful long-term investors. Impressively, First Capital has grown EPS by 18% per year, compound, in the last three years. As a general rule, we'd say that if a company can keep up that sort of growth, shareholders will be smiling.
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). Not all of First Capital's revenue this year is revenue from operations, so keep in mind the revenue and margin numbers I've used might not be the best representation of the underlying business. While we note First Capital's EBIT margins were flat over the last year, revenue grew by a solid 9.7% to US$35m. That's a real positive.
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.
First Capital isn't a huge company, given its market capitalization of US$223m. That makes it extra important to check on its balance sheet strength.
Are First Capital Insiders Aligned With All Shareholders?
As a general rule, I think it worth considering how much the CEO is paid, since unreasonably high rates could be considered against the interests of shareholders. For companies with market capitalizations between US$100m and US$400m, like First Capital, the median CEO pay is around US$1.1m.
The CEO of First Capital only received US$337k in total compensation for the year ending December 2018. That's clearly well below average, so at a glance, that arrangement seems generous to shareholders, and points to a modest remuneration culture. 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.
Should You Add First Capital To Your Watchlist?
You can't deny that First Capital has grown its earnings per share at a very impressive rate. That's attractive. The fast growth bodes well while the very reasonable CEO pay assists builds some confidence in the board. So I'd venture it may well deserve a spot on your watchlist, or even a little further research. Now, you could try to make up your mind on First Capital by focusing on just these factors, or you could also consider how its price-to-earnings ratio compares to other companies in its industry.
Of course, you can do well (sometimes) buying stocks that are not growing earnings and do not have insiders buying shares. But as a growth investor I always like to check out companies that do have those features. You can access 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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