Like a puppy chasing its tail, some new investors often chase 'the next big thing', even if that means buying 'story stocks' without revenue, let alone profit. But as Warren Buffett has mused, 'If you've been playing poker for half an hour and you still don't know who the patsy is, you're the patsy.' When they buy such story stocks, investors are all too often the patsy.
In contrast to all that, I prefer to spend time on companies like Shanghai Fudan-Zhangjiang Bio-Pharmaceutical (HKG:1349), which has not only revenues, but also profits. 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.
How Fast Is Shanghai Fudan-Zhangjiang Bio-Pharmaceutical Growing?
As one of my mentors once told me, share price follows earnings per share (EPS). Therefore, there are plenty of investors who like to buy shares in companies that are growing EPS. Over the last three years, Shanghai Fudan-Zhangjiang Bio-Pharmaceutical has grown EPS by 12% per year. That's a pretty good rate, if the company can sustain it.
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. The good news is that Shanghai Fudan-Zhangjiang Bio-Pharmaceutical is growing revenues, and EBIT margins improved by 7.6 percentage points to 20%, over the last year. That's great to see, on both counts.
The chart below shows how the company's bottom and top lines have progressed over time. To see the actual numbers, click on the chart.
While it's always good to see growing profits, you should always remember that a weak balance sheet could come back to bite. So check Shanghai Fudan-Zhangjiang Bio-Pharmaceutical's balance sheet strength, before getting too excited.
Are Shanghai Fudan-Zhangjiang Bio-Pharmaceutical 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 Shanghai Fudan-Zhangjiang Bio-Pharmaceutical shares worth a considerable sum. Notably, they have an enormous stake in the company, worth CN¥1.1b. Coming in at 20% of the business, that holding gives insiders a lot of influence, and plenty of reason to generate value for shareholders. So it might be my imagination, but I do sense the glimmer of an opportunity.
Should You Add Shanghai Fudan-Zhangjiang Bio-Pharmaceutical To Your Watchlist?
One positive for Shanghai Fudan-Zhangjiang Bio-Pharmaceutical is that it is growing EPS. That's nice to see. If that's not enough on its own, there is also the rather notable levels of insider ownership. The combination sparks joy for me, so I'd consider keeping the company on a watchlist. Of course, just because Shanghai Fudan-Zhangjiang Bio-Pharmaceutical 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.
You can invest in any company you want. But if you prefer to focus on stocks that have demonstrated insider buying, here is a list of companies with insider buying in the last three months.
Please note the insider transactions discussed in this article refer to reportable transactions in the relevant jurisdiction
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