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Here's Why We Think Horizon Oil (ASX:HZN) Is Well Worth Watching

It's common for many investors, especially those who are inexperienced, to buy shares in companies with a good story even if these companies are loss-making. But as Peter Lynch said in One Up On Wall Street, 'Long shots almost never pay off.' A loss-making company is yet to prove itself with profit, and eventually the inflow of external capital may dry up.

So if this idea of high risk and high reward doesn't suit, you might be more interested in profitable, growing companies, like Horizon Oil (ASX:HZN). While this doesn't necessarily speak to whether it's undervalued, the profitability of the business is enough to warrant some appreciation - especially if its growing.

Check out our latest analysis for Horizon Oil

Horizon Oil's Earnings Per Share Are Growing

The market is a voting machine in the short term, but a weighing machine in the long term, so you'd expect share price to follow earnings per share (EPS) outcomes eventually. That means EPS growth is considered a real positive by most successful long-term investors. Horizon Oil managed to grow EPS by 7.0% per year, over three years. While that sort of growth rate isn't anything to write home about, it does show the business is growing.

Careful consideration of revenue growth and earnings before interest and taxation (EBIT) margins can help inform a view on the sustainability of the recent profit growth. Horizon Oil shareholders can take confidence from the fact that EBIT margins are up from 31% to 35%, and revenue is growing. Ticking those two boxes is a good sign of growth, in our book.

You can take a look at the company's revenue and earnings growth trend, in the chart below. For finer detail, click on the image.

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

Since Horizon Oil is no giant, with a market capitalisation of AU$272m, you should definitely check its cash and debt before getting too excited about its prospects.

Are Horizon Oil Insiders Aligned With All Shareholders?

Investors are always searching for a vote of confidence in the companies they hold and insider buying is one of the key indicators for optimism on the market. This view is based on the possibility that stock purchases signal bullishness on behalf of the buyer. Of course, we can never be sure what insiders are thinking, we can only judge their actions.

We haven't seen any insiders selling Horizon Oil shares, in the last year. With that in mind, it's heartening that Gregory Bittar, the Non-Executive Director of the company, paid US$30k for shares at around US$0.12 each. Decent buying like this could be a sign for shareholders here; management sees the company as undervalued.

It's commendable to see that insiders have been buying shares in Horizon Oil, but there is more evidence of shareholder friendly management. Specifically, the CEO is paid quite reasonably for a company of this size. The median total compensation for CEOs of companies similar in size to Horizon Oil, with market caps between US$100m and US$400m, is around US$638k.

Horizon Oil's CEO took home a total compensation package worth US$491k in the year leading up to June 2022. That comes in below the average for similar sized companies and seems pretty reasonable. While the level of CEO compensation shouldn't be the biggest factor in how the company is viewed, modest remuneration is a positive, because it suggests that the board keeps shareholder interests in mind. It can also be a sign of good governance, more generally.

Does Horizon Oil Deserve A Spot On Your Watchlist?

One important encouraging feature of Horizon Oil is that it is growing profits. And there's more to Horizon Oil, with the insider buying and modest CEO pay being a great look for those with an eye on the company. All things considered, Horizon Oil is certainly displaying its merits and is worthy of taking research to the next step. It's still necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Horizon Oil , and understanding it should be part of your investment process.

Keen growth investors love to see insider buying. Thankfully, Horizon Oil 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.

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.

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