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 Peter Lynch said in One Up On Wall Street, 'Long shots almost never pay off.'
In the age of tech-stock blue-sky investing, my choice may seem old fashioned; I still prefer profitable companies like Innovative Solutions and Support (NASDAQ:ISSC). While that doesn't make the shares worth buying at any price, you can't deny that successful capitalism requires profit, eventually. In comparison, loss making companies act like a sponge for capital - but unlike such a sponge they do not always produce something when squeezed.
Innovative Solutions and Support's Improving Profits
Over the last three years, Innovative Solutions and Support 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. As a result, I'll zoom in on growth over the last year, instead. Like a falcon taking flight, Innovative Solutions and Support's EPS soared from US$0.13 to US$0.20, over the last year. That's a impressive gain of 46%.
I like to take a look at earnings before interest and (EBIT) tax margins, as well as revenue growth, to get another take on the quality of the company's growth. Innovative Solutions and Support shareholders can take confidence from the fact that EBIT margins are up from 8.2% to 15%, and revenue is growing. Ticking those two boxes is a good sign of growth, in my book.
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.
Innovative Solutions and Support isn't a huge company, given its market capitalization of US$96m. That makes it extra important to check on its balance sheet strength.
Are Innovative Solutions and Support Insiders Aligned With All Shareholders?
I like company leaders to have some skin in the game, so to speak, because it increases alignment of incentives between the people running the business, and its true owners. As a result, I'm encouraged by the fact that insiders own Innovative Solutions and Support shares worth a considerable sum. Indeed, they hold US$31m worth of its stock. That shows significant buy-in, and may indicate conviction in the business strategy. Those holdings account for over 32% of the company; visible skin in the game.
It means a lot to see insiders invested in the business, but I find myself wondering if remuneration policies are shareholder friendly. Well, based on the CEO pay, I'd say they are indeed. I discovered that the median total compensation for the CEOs of companies like Innovative Solutions and Support with market caps under US$200m is about US$529k.
The Innovative Solutions and Support CEO received US$408k in compensation for the year ending . That seems pretty reasonable, especially given its below the median for similar sized companies. 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 Innovative Solutions and Support To Your Watchlist?
You can't deny that Innovative Solutions and Support has grown its earnings per share at a very impressive rate. That's attractive. If you need more convincing beyond that EPS growth rate, don't forget about the reasonable remuneration and the high insider ownership. This may only be a fast rundown, but the takeaway for me is that Innovative Solutions and Support is worth keeping an eye on. However, before you get too excited we've discovered 3 warning signs for Innovative Solutions and Support that you should be aware of.
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.
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. 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.
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