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Investors are often guided by the idea of discovering 'the next big thing', even if that means buying 'story stocks' without any revenue, let alone profit. But as Peter Lynch said in One Up On Wall Street, 'Long shots almost never pay off.' While a well funded company may sustain losses for years, it will need to generate a profit eventually, or else investors will move on and the company will wither away.
Despite being in the age of tech-stock blue-sky investing, many investors still adopt a more traditional strategy; buying shares in profitable companies like Salesforce (NYSE:CRM). Now this is not to say that the company presents the best investment opportunity around, but profitability is a key component to success in business.
Salesforce's Improving Profits
Over the last three years, Salesforce has grown earnings per share (EPS) at as impressive rate from a relatively low point, resulting in a three year percentage growth rate that isn't particularly indicative of expected future performance. As a result, we'll zoom in on growth over the last year, instead. To the delight of shareholders, Salesforce's EPS soared from US$4.25 to US$6.46, over the last year. That's a impressive gain of 52%.
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. Salesforce shareholders can take confidence from the fact that EBIT margins are up from 17% to 20%, and revenue is growing. Ticking those two boxes is a good sign of growth, in our 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.
View our latest analysis for Salesforce
In investing, as in life, the future matters more than the past. So why not check out this free interactive visualization of Salesforce's forecast profits?
Are Salesforce Insiders Aligned With All Shareholders?
We would not expect to see insiders owning a large percentage of a US$258b company like Salesforce. But we are reassured by the fact they have invested in the company. Notably, they have an enviable stake in the company, worth US$6.5b. This suggests that leadership will be very mindful of shareholders' interests when making decisions!
Does Salesforce Deserve A Spot On Your Watchlist?
You can't deny that Salesforce has grown its earnings per share at a very impressive rate. That's attractive. Further, the high level of insider ownership is impressive and suggests that the management appreciates the EPS growth and has faith in Salesforce's continuing strength. On the balance of its merits, solid EPS growth and company insiders who are aligned with the shareholders would indicate a business that is worthy of further research. We don't want to rain on the parade too much, but we did also find 1 warning sign for Salesforce that you need to be mindful of.