Here's Why I Think Resonance Health (ASX:RHT) Might Deserve Your Attention Today
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 the age of tech-stock blue-sky investing, my choice may seem old fashioned; I still prefer profitable companies like Resonance Health (ASX:RHT). Even if the shares are fully valued today, most capitalists would recognize its profits as the demonstration of steady value generation. Conversely, a loss-making company is yet to prove itself with profit, and eventually the sweet milk of external capital may run sour.
See our latest analysis for Resonance Health
Resonance Health's Improving Profits
In business, though not in life, profits are a key measure of success; and share prices tend to reflect earnings per share (EPS). So like a ray of sunshine through a gap in the clouds, improving EPS is considered a good sign. It is therefore awe-striking that Resonance Health's EPS went from AU$0.00056 to AU$0.0031 in just one year. Even though that growth rate is unlikely to be repeated, that looks like a breakout improvement. Could this be a sign that the business has reached an inflection point?
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. The good news is that Resonance Health is growing revenues, and EBIT margins improved by 33.0 percentage points to 28%, over the last year. Ticking those two boxes is a good sign of growth, in my book.
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.
Since Resonance Health is no giant, with a market capitalization of AU$109m, so you should definitely check its cash and debt before getting too excited about its prospects.
Are Resonance Health Insiders Aligned With All Shareholders?
Like that fresh smell in the air when the rains are coming, insider buying fills me with optimistic anticipation. Because oftentimes, the purchase of stock is a sign that the buyer views it as undervalued. However, insiders are sometimes wrong, and we don't know the exact thinking behind their acquisitions.
The good news for Resonance Health shareholders is that no insiders reported selling shares in the last year. With that in mind, it's heartening that Simon Panton, the Independent Director of the company, paid AU$71k for shares at around AU$0.071 each.
On top of the insider buying, it's good to see that Resonance Health insiders have a valuable investment in the business. To be specific, they have AU$33m worth of shares. That's a lot of money, and no small incentive to work hard. That amounts to 31% of the company, demonstrating a degree of high-level alignment with shareholders.
While insiders already own a significant amount of shares, and they have been buying more, the good news for ordinary shareholders does not stop there. That's because on our analysis the CEO, Alison Laws, is paid less than the median for similar sized companies. I discovered that the median total compensation for the CEOs of companies like Resonance Health with market caps under AU$290m is about AU$379k.
The Resonance Health CEO received AU$196k in compensation for the year ending June 2019. That comes in below the average for similar sized companies, and seems pretty reasonable to me. 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. I'd also argue reasonable pay levels attest to good decision making more generally.
Is Resonance Health Worth Keeping An Eye On?
Resonance Health's earnings per share have taken off like a rocket aimed right at the moon. The incing on the cake is that insiders own a large chunk of the company and one has even been buying more shares. Because of the potential that it has reached an inflection point, I'd suggest Resonance Health belongs on the top of your watchlist. Of course, profit growth is one thing but it's even better if Resonance Health is receiving high returns on equity, since that should imply it can keep growing without much need for capital. Click on this link to see how it is faring against the average in its industry.
There are plenty of other companies that have insiders buying up shares. So if you like the sound of Resonance Health, you'll probably love this free list of growing companies that insiders are buying.
Please note the insider transactions discussed in this article refer to reportable transactions in the relevant jurisdiction
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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.
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