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Do Probiotec's (ASX:PBP) Earnings Warrant Your Attention?

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·3 min read
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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. Unfortunately, high risk investments often have little probability of ever paying off, and many investors pay a price to learn their lesson.

In contrast to all that, I prefer to spend time on companies like Probiotec (ASX:PBP), which has not only revenues, but also profits. 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 Probiotec

How Quickly Is Probiotec Increasing Earnings Per Share?

As one of my mentors once told me, share price follows earnings per share (EPS). That makes EPS growth an attractive quality for any company. Impressively, Probiotec has grown EPS by 25% per year, compound, in the last three years. As a general rule, we'd say that if a company can keep up that sort of growth, shareholders will be smiling.

One way to double-check a company's growth is to look at how its revenue, and earnings before interest and tax (EBIT) margins are changing. Probiotec maintained stable EBIT margins over the last year, all while growing revenue 25% to AU$106m. That's a real positive.

The chart below shows how the company's bottom and top lines have progressed over time. Click on the chart to see the exact numbers.

earnings-and-revenue-history
earnings-and-revenue-history

Probiotec isn't a huge company, given its market capitalization of AU$157m. That makes it extra important to check on its balance sheet strength.

Are Probiotec 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. This view is based on the possibility that stock purchases signal bullishness on behalf of the buyer. However, insiders are sometimes wrong, and we don't know the exact thinking behind their acquisitions.

Not only did Probiotec insiders refrain from selling stock during the year, but they also spent AU$165k buying it. That's nice to see, because it suggests insiders are optimistic. It is also worth noting that it was Non-Executive Director Jonathan Wenig who made the biggest single purchase, worth AU$90k, paying AU$1.90 per share.

The good news, alongside the insider buying, for Probiotec bulls is that insiders (collectively) have a meaningful investment in the stock. Indeed, they hold AU$46m worth of its stock. That's a lot of money, and no small incentive to work hard. That amounts to 29% of the company, demonstrating a degree of high-level alignment with shareholders.

Should You Add Probiotec To Your Watchlist?

You can't deny that Probiotec has grown its earnings per share at a very impressive rate. That's attractive. On top of that, insiders own a significant stake in the company and have been buying more shares. So I do think this is one stock worth watching. You still need to take note of risks, for example - Probiotec has 3 warning signs (and 1 which is significant) we think you should know about.

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

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. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.