Investors are often guided by the idea of discovering 'the next big thing', even if that means buying 'story stocks' without any revenue, let alone 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. Loss-making companies are always racing against time to reach financial sustainability, so investors in these companies may be taking on more risk than they should.
Despite being in the age of tech-stock blue-sky investing, many investors still adopt a more traditional strategy; buying shares in profitable companies like NVE (NASDAQ:NVEC). While profit isn't the sole metric that should be considered when investing, it's worth recognising businesses that can consistently produce it.
NVE's Earnings Per Share Are Growing
Generally, companies experiencing growth in earnings per share (EPS) should see similar trends in share price. That makes EPS growth an attractive quality for any company. NVE managed to grow EPS by 8.6% per year, over three years. That's a pretty good rate, if the company can sustain it.
It's often helpful to take a look at earnings before interest and tax (EBIT) margins, as well as revenue growth, to get another take on the quality of the company's growth. The music to the ears of NVE shareholders is that EBIT margins have grown from 61% to 65% in the last 12 months and revenues are on an upwards trend as well. Ticking those two boxes is a good sign of growth, in our book.
In the chart below, you can see how the company has grown earnings and revenue, over time. Click on the chart to see the exact numbers.
While profitability drives the upside, prudent investors always check the balance sheet, too.
Are NVE Insiders Aligned With All Shareholders?
It's said that there's no smoke without fire. For investors, insider buying is often the smoke that indicates which stocks could set the market alight. That's because insider buying often indicates that those closest to the company have confidence that the share price will perform well. However, insiders are sometimes wrong, and we don't know the exact thinking behind their acquisitions.
We haven't seen any insiders selling NVE shares, in the last year. Add in the fact that James Bracke, the Independent Director of the company, paid US$29k for shares at around US$57.40 each. Decent buying like this could be a sign for shareholders here; management sees the company as undervalued.
Recent insider purchases of NVE stock is not the only way management has kept the interests of the general public shareholders in mind. Namely, NVE has a very reasonable level of CEO pay. Our analysis has discovered that the median total compensation for the CEOs of companies like NVE with market caps between US$200m and US$800m is about US$2.8m.
The CEO of NVE only received US$698k in total compensation for the year ending March 2022. 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 shouldn't be the biggest factor in how the company is viewed, 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 NVE To Your Watchlist?
One important encouraging feature of NVE is that it is growing profits. And there's more to love too, with modest CEO remuneration and insider buying interest continuing the positives for the company. The sum of all that, points to a quality business, and a genuine prospect for further research. We should say that we've discovered 1 warning sign for NVE that you should be aware of before investing here.
Keen growth investors love to see insider buying. Thankfully, NVE isn't the only one. You can see a 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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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.
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