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Is Now The Time To Put Smiths Group (LON:SMIN) On Your Watchlist?

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. 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.

So if you're like me, you might be more interested in profitable, growing companies, like Smiths Group (LON:SMIN). While that doesn't make the shares worth buying at any price, you can't deny that successful capitalism requires profit, eventually. In comparison, loss making companies act like a sponge for capital - but unlike such a sponge they do not always produce something when squeezed.

Check out our latest analysis for Smiths Group

How Quickly Is Smiths Group Increasing Earnings Per Share?

As one of my mentors once told me, share price follows earnings per share (EPS). That means EPS growth is considered a real positive by most successful long-term investors. I, for one, am blown away by the fact that Smiths Group has grown EPS by 58% per year, over the last three years. While that sort of growth rate isn't sustainable for long, it certainly catches my attention; like a crow with a sparkly stone.

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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. This approach makes Smiths Group look pretty good, on balance; although revenue is flattish, EBIT margins improved from 9.3% to 15% in the last year. 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

The trick, as an investor, is to find companies that are going to perform well in the future, not just in the past. To that end, right now and today, you can check our visualization of consensus analyst forecasts for future Smiths Group EPS 100% free.

Are Smiths Group Insiders Aligned With All Shareholders?

Like standing at the lookout, surveying the horizon at sunrise, insider buying, for some investors, sparks joy. This view is based on the possibility that stock purchases signal bullishness on behalf of the buyer. However, small purchases are not always indicative of conviction, and insiders don't always get it right.

It's good to see Smiths Group insiders walking the walk, by spending UK£196k on shares in just twelve months. When you contrast that with the complete lack of sales, it's easy for shareholders to brim with joyful expectancy. Zooming in, we can see that the biggest insider purchase was by John Shipsey for UK£99k worth of shares, at about UK£14.42 per share.

It's reassuring that Smiths Group insiders are buying the stock, but that's not the only reason to think management are fair to shareholders. I refer to the very reasonable level of CEO pay. I discovered that the median total compensation for the CEOs of companies like Smiths Group with market caps between UK£3.2b and UK£9.5b is about UK£2.7m.

The Smiths Group CEO received total compensation of just UK£1.2m in the year to . That looks like modest pay to me, and may hint at a certain respect for the interests of shareholders. While the level of CEO compensation isn't a huge factor in my view of the company, 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.

Is Smiths Group Worth Keeping An Eye On?

Smiths Group's earnings per share growth have been levitating higher, like a mountain goat scaling the Alps. The company can also boast of insider buying, and reasonable remuneration for the CEO. It could be that Smiths Group is at an inflection point, given the EPS growth. For those chasing fast growth, then, I'd suggest to stock merits monitoring. Don't forget that there may still be risks. For instance, we've identified 1 warning sign for Smiths Group that you should be aware of.

There are plenty of other companies that have insiders buying up shares. So if you like the sound of Smiths 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.