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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. 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 Gowing Bros (ASX:GOW). 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 Gowing Bros Growing Its Earnings Per Share?
Over the last three years, Gowing Bros has grown earnings per share (EPS) like young bamboo after rain; fast, and from a low base. So I don't think the percent growth rate is particularly meaningful. Thus, it makes sense to focus on more recent growth rates, instead. Like a firecracker arcing through the night sky, Gowing Bros's EPS shot from AU$0.11 to AU$0.23, over the last year. You don't see 106% year-on-year growth like that, very often. That could be a sign that the business has reached a true inflection point.
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 Gowing Bros's revenue from operations was lower than its revenue in the last twelve months, so that could distort my analysis of its margins. Gowing Bros shareholders can take confidence from the fact that EBIT margins are up from 18% to 21%, and revenue is growing. That's great to see, on both counts.
The chart below shows how the company's bottom and top lines have progressed over time. For finer detail, click on the image.
Gowing Bros isn't a huge company, given its market capitalization of AU$165m. That makes it extra important to check on its balance sheet strength.
Are Gowing Bros Insiders Aligned With All Shareholders?
Like standing at the lookout, surveying the horizon at sunrise, insider buying, for some investors, sparks joy. 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.
Gowing Bros top brass are certainly in sync, not having sold any shares, over the last year. But my excitement comes from the AU$136k that Non-Executive Chairman of the Board Jonathan West spent buying shares (at an average price of about AU$3.17).
And the insider buying isn't the only sign of alignment between shareholders and the board, since Gowing Bros insiders own more than a third of the company. Actually, with 47% 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. With that sort of holding, insiders have about AU$77m riding on the stock, at current prices. That's nothing to sneeze at!
While insiders are apparently happy to hold and accumulate shares, that is just part of the pretty picture. That's because on our analysis the CEO, John Gowing, is paid less than the median for similar sized companies. For companies with market capitalizations under AU$282m, like Gowing Bros, the median CEO pay is around AU$403k.
The CEO of Gowing Bros only received AU$114k in total compensation for the year ending . That's clearly well below average, so at a glance, that arrangement seems generous to shareholders, and points to a modest remuneration culture. 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.
Does Gowing Bros Deserve A Spot On Your Watchlist?
Gowing Bros's earnings per share have taken off like a rocket aimed right at the moon. The cherry on top is that insiders own a bunch of shares, and one has been buying more. This quick rundown suggests that the business may be of good quality, and also at an inflection point, so maybe Gowing Bros deserves timely attention. Before you take the next step you should know about the 1 warning sign for Gowing Bros that we have uncovered.
There are plenty of other companies that have insiders buying up shares. So if you like the sound of Gowing Bros, you'll probably love this free list of growing companies that insiders are buying.
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.