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. But as Warren Buffett has mused, 'If you've been playing poker for half an hour and you still don't know who the patsy is, you're the patsy.' When they buy such story stocks, investors are all too often the patsy.
In the age of tech-stock blue-sky investing, my choice may seem old fashioned; I still prefer profitable companies like Resource Development Group (ASX:RDG). Even if the shares are fully valued today, most capitalists would recognize its profits as the demonstration of steady value generation. 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.
How Fast Is Resource Development Group Growing Its Earnings Per Share?
Even with very modest growth rates, a company will usually do well if it improves earnings per share (EPS) year after year. So it's no surprise that some investors are more inclined to invest in profitable businesses. You can imagine, then, that it almost knocked my socks off when I realized that Resource Development Group grew its EPS from AU$0.000033 to AU$0.00047, in one short year. When you see earnings grow that quickly, it often means good things ahead for the company. But the key is discerning whether something profound has changed, or if this is a just a one-off boost.
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). Resource Development Group shareholders can take confidence from the fact that EBIT margins are up from 0.2% to 3.0%, and revenue is growing. Ticking those two boxes is a good sign of growth, in my book.
The chart below shows how the company's bottom and top lines have progressed over time. To see the actual numbers, click on the chart.
Resource Development Group isn't a huge company, given its market capitalization of AU$138m. That makes it extra important to check on its balance sheet strength.
Are Resource Development Group 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. Of course, we can never be sure what insiders are thinking, we can only judge their actions.
The good news for Resource Development Group shareholders is that no insiders reported selling shares in the last year. So it's definitely nice that MD & Director Andrew Ellison bought AU$50k worth of shares at an average price of around AU$0.04.
Should You Add Resource Development Group To Your Watchlist?
Resource Development Group's earnings per share have taken off like a rocket aimed right at the moon. If you're like me, you'll find it hard to ignore that sort of explosive EPS growth. And in fact, it could well signal a fundamental shift in the business economics. For me, this situation certainly piques my interest. We should say that we've discovered 3 warning signs for Resource Development Group that you should be aware of before investing here.
There are plenty of other companies that have insiders buying up shares. So if you like the sound of Resource Development Group, 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.