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Is Now The Time To Put Gullewa (ASX:GUL) On Your Watchlist?

Simply Wall St

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It's only natural that many investors, especially those who are new to the game, prefer to buy shares in 'sexy' stocks with a good story, even if those businesses lose money. But as Peter Lynch said in One Up On Wall Street, 'Long shots almost never pay off.'

If, on the other hand, you like companies that have revenue, and even earn profits, then you may well be interested in Gullewa (ASX:GUL). While that doesn't make the shares worth buying at any price, you can't deny that successful capitalism requires profit, eventually. 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 Gullewa

How Fast Is Gullewa Growing Its Earnings Per Share?

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 the hint of a smile on a face that I love, growing EPS generally makes me look twice. You can imagine, then, that it almost knocked my socks off when I realized that Gullewa grew its EPS from AU$0.0028 to AU$0.0096, in one short year. When you see earnings grow that quickly, it often means good things ahead for the company.

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. I note that Gullewa's revenue from operations was lower than its revenue in the last twelve months, so that could distort my analysis of its margins. Gullewa shareholders can take confidence from the fact that EBIT margins are up from 47% to 63%, and revenue is growing. 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. For finer detail, click on the image.

ASX:GUL Income Statement, July 8th 2019

Gullewa isn't a huge company, given its market capitalization of AU$4.7m. That makes it extra important to check on its balance sheet strength.

Are Gullewa Insiders Aligned With All Shareholders?

Like the kids in the streets standing up for their beliefs, insider share purchases give me reason to believe in a brighter future. 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 do note that Gullewa insiders netted -AU$3.5k worth of shares over the last year. On the other hand, Chairman of the Board Anthony Howland-Rose paid AU$14k for shares, at a price of about AU$0.026 per share. So, on balance, that's positive.

And the insider buying isn't the only sign of alignment between shareholders and the board, since Gullewa insiders own more than a third of the company. Actually, with 46% of the company to their names, insiders are profoundly invested in the business. I'm reassured by this kind of alignment, as it suggests the business will be run for the benefit of shareholders. Of course, Gullewa is a very small company, with a market cap of only AU$4.7m. That means insiders only have AU$2.1m worth of shares, despite the large proportional holding. That might not be a huge sum but it should be enough to keep insiders motivated!

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. The cherry on top is that the CEO, David Deitz is paid comparatively modestly to CEOs at similar sized companies. I discovered that the median total compensation for the CEOs of companies like Gullewa with market caps under AU$287m is about AU$354k.

The Gullewa CEO received AU$215k in compensation for the year ending June 2018. That seems pretty reasonable, especially given its 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.

Does Gullewa Deserve A Spot On Your Watchlist?

Gullewa's earnings have taken off like any random crypto-currency did, back in 2017. The company can also boast of insider buying, and reasonable remuneration for the CEO. It could be that Gullewa is at an inflection point, given the EPS growth. For those chasing fast growth, then, I'd suggest to stock merits monitoring. Of course, profit growth is one thing but it's even better if Gullewa 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.

As a growth investor I do like to see insider buying. But Gullewa 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

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

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. Thank you for reading.