Is Now The Time To Put ADvTECH (JSE:ADH) On Your Watchlist?
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. Unfortunately, these high risk investments often have little probability of ever paying off, and many investors pay a price to learn their lesson. Loss making companies can act like a sponge for capital - so investors should be cautious that they're not throwing good money after bad.
If this kind of company isn't your style, you like companies that generate revenue, and even earn profits, then you may well be interested in ADvTECH (JSE:ADH). While this doesn't necessarily speak to whether it's undervalued, the profitability of the business is enough to warrant some appreciation - especially if its growing.
See our latest analysis for ADvTECH
ADvTECH's Earnings Per Share Are Growing
If a company can keep growing earnings per share (EPS) long enough, its share price should eventually follow. That means EPS growth is considered a real positive by most successful long-term investors. Impressively, ADvTECH has grown EPS by 17% per year, compound, in the last three years. If growth like this continues on into the future, then shareholders will have plenty to smile about.
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. ADvTECH maintained stable EBIT margins over the last year, all while growing revenue 16% to R6.4b. That's a real positive.
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.
While profitability drives the upside, prudent investors always check the balance sheet, too.
Are ADvTECH 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.
Even though some insiders sold down their holdings, their actions speak louder than words with R9.8m more invested than sold by people who know they company best. An optimistic sign for those with ADvTECH in their watchlist. Zooming in, we can see that the biggest insider purchase was by Group CEO & Executive Director Roy Douglas for R5.1m worth of shares, at about R17.89 per share.
Along with the insider buying, another encouraging sign for ADvTECH is that insiders, as a group, have a considerable shareholding. To be specific, they have R576m worth of shares. This considerable investment should help drive long-term value in the business. As a percentage, this totals to 6.3% of the shares on issue for the business, an appreciable amount considering the market cap.
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, Roy Douglas, is paid less than the median for similar sized companies. For companies with market capitalisations between R3.6b and R15b, like ADvTECH, the median CEO pay is around R11m.
ADvTECH offered total compensation worth R9.4m to its CEO in the year to December 2021. That seems pretty reasonable, especially given it's below the median for similar sized companies. CEO remuneration levels are not the most important metric for investors, but when the pay is modest, that does support enhanced alignment between the CEO and the ordinary shareholders. It can also be a sign of a culture of integrity, in a broader sense.
Should You Add ADvTECH To Your Watchlist?
If you believe that share price follows earnings per share you should definitely be delving further into ADvTECH's strong EPS growth. On top of that, insiders own a significant stake in the company and have been buying more shares. These things considered, this is one stock worth watching. Don't forget that there may still be risks. For instance, we've identified 1 warning sign for ADvTECH that you should be aware of.
Keen growth investors love to see insider buying. Thankfully, ADvTECH 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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