It's only natural that many investors, especially those who are new to the game, prefer to buy shares in 'sexy' stocks with a good story, even if those businesses lose money. Unfortunately, high risk investments often have little probability of ever paying off, and many investors pay a price to learn their lesson.
In the age of tech-stock blue-sky investing, my choice may seem old fashioned; I still prefer profitable companies like Hydrogen Group (LON:HYDG). 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 Hydrogen Group Growing Its Earnings Per Share?
In a capitalist society capital chases profits, and that means share prices tend rise with earnings per share (EPS). So like the hint of a smile on a face that I love, growing EPS generally makes me look twice. You can imagine, then, that it almost knocked my socks off when I realized that Hydrogen Group grew its EPS from UK£0.01 to UK£0.077, in one short year. When you see earnings grow that quickly, it often means good things ahead for the company.
Careful consideration of revenue growth and earnings before interest and taxation (EBIT) margins can help inform a view on the sustainability of the recent profit growth. While Hydrogen Group may have maintained EBIT margins over the last year, revenue has fallen. Suffice it to say that is not a great sign of growth.
You can take a look at the company's revenue and earnings growth trend, in the chart below. For finer detail, click on the image.
Since Hydrogen Group is no giant, with a market capitalization of UK£18m, so you should definitely check its cash and debt before getting too excited about its prospects.
Are Hydrogen Group 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 as you can imagine, the fact that Hydrogen Group insiders own a significant number of shares certainly appeals to me. Indeed, with a collective holding of 53%, 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. Valued at only UK£18m Hydrogen Group is really small for a listed company. That means insiders only have UK£9.5m worth of shares, despite the large proportional holding. That might not be a huge sum but it should be enough to keep insiders motivated!
Should You Add Hydrogen Group To Your Watchlist?
Hydrogen Group's earnings per share growth have been levitating higher, like a mountain goat scaling the Alps. That EPS growth certainly has my attention, and the large insider ownership only serves to further stoke my interest. At times fast EPS growth is a sign the business has reached an inflection point; and I do like those. So to my mind Hydrogen Group is worth putting on your watchlist; after all, shareholders do well when the market underestimates fast growing companies. Of course, just because Hydrogen 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.
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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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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. Thank you for reading.