Australia markets closed
  • ALL ORDS

    7,490.10
    -178.80 (-2.33%)
     
  • ASX 200

    7,175.80
    -166.60 (-2.27%)
     
  • AUD/USD

    0.7187
    -0.0041 (-0.56%)
     
  • OIL

    86.29
    -0.61 (-0.70%)
     
  • GOLD

    1,836.10
    -6.50 (-0.35%)
     
  • BTC-AUD

    50,107.02
    +347.43 (+0.70%)
     
  • CMC Crypto 200

    870.86
    +628.18 (+258.85%)
     
  • AUD/EUR

    0.6333
    -0.0054 (-0.85%)
     
  • AUD/NZD

    1.0702
    +0.0008 (+0.07%)
     
  • NZX 50

    12,348.00
    -149.10 (-1.19%)
     
  • NASDAQ

    14,438.40
    -408.06 (-2.75%)
     
  • FTSE

    7,494.13
    -90.88 (-1.20%)
     
  • Dow Jones

    34,265.37
    -450.02 (-1.30%)
     
  • DAX

    15,603.88
    -308.45 (-1.94%)
     
  • Hang Seng

    24,965.55
    +13.20 (+0.05%)
     
  • NIKKEI 225

    27,522.26
    -250.67 (-0.90%)
     

Does Australian Ethical Investment (ASX:AEF) Deserve A Spot On Your Watchlist?

  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
·4-min read
In this article:
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
  • AEF.AX
  • GASH.MI

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. And in their study titled Who Falls Prey to the Wolf of Wall Street?' Leuz et. al. found that it is 'quite common' for investors to lose money by buying into 'pump and dump' schemes.

If, on the other hand, you like companies that have revenue, and even earn profits, then you may well be interested in Australian Ethical Investment (ASX:AEF). While that doesn't make the shares worth buying at any price, you can't deny that successful capitalism requires profit, eventually. Loss-making companies are always racing against time to reach financial sustainability, but time is often a friend of the profitable company, especially if it is growing.

View our latest analysis for Australian Ethical Investment

How Quickly Is Australian Ethical Investment Increasing Earnings Per Share?

If a company can keep growing earnings per share (EPS) long enough, its share price will eventually follow. That means EPS growth is considered a real positive by most successful long-term investors. As a tree reaches steadily for the sky, Australian Ethical Investment's EPS has grown 28% each year, compound, over three years. As a result, we can understand why the stock trades on a high multiple of trailing twelve month earnings.

I like to see top-line growth as an indication that growth is sustainable, and I look for a high earnings before interest and taxation (EBIT) margin to point to a competitive moat (though some companies with low margins also have moats). While we note Australian Ethical Investment's EBIT margins were flat over the last year, revenue grew by a solid 18% to AU$59m. That's a real positive.

In the chart below, you can see how the company has grown earnings, and revenue, over time. For finer detail, click on the image.

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

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 Australian Ethical Investment's balance sheet strength, before getting too excited.

Are Australian Ethical Investment Insiders Aligned With All Shareholders?

It makes me feel more secure owning shares in a company if insiders also own shares, thusly more closely aligning our interests. So it is good to see that Australian Ethical Investment insiders have a significant amount of capital invested in the stock. Notably, they have an enormous stake in the company, worth AU$383m. Coming in at 25% 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.

It's good to see that insiders are invested in the company, but are remuneration levels reasonable? A brief analysis of the CEO compensation suggests they are. I discovered that the median total compensation for the CEOs of companies like Australian Ethical Investment with market caps between AU$562m and AU$2.2b is about AU$1.4m.

The Australian Ethical Investment CEO received AU$749k in compensation for the year ending . That comes in below the average for similar sized companies, and seems pretty reasonable to me. 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. I'd also argue reasonable pay levels attest to good decision making more generally.

Should You Add Australian Ethical Investment To Your Watchlist?

You can't deny that Australian Ethical Investment has grown its earnings per share at a very impressive rate. That's attractive. If you need more convincing beyond that EPS growth rate, don't forget about the reasonable remuneration and the high insider ownership. Each to their own, but I think all this makes Australian Ethical Investment look rather interesting indeed. It is worth noting though that we have found 1 warning sign for Australian Ethical Investment that you need to take into consideration.

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.

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.

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

Our goal is to create a safe and engaging place for users to connect over interests and passions. In order to improve our community experience, we are temporarily suspending article commenting