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Like a puppy chasing its tail, some new investors often chase 'the next big thing', even if that means buying 'story stocks' without revenue, let alone 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.
In contrast to all that, I prefer to spend time on companies like Beijing Enterprises Water Group (HKG:371), which has not only revenues, but also profits. Now, I'm not saying that the stock is necessarily undervalued today; but I can't shake an appreciation for the profitability of the business itself. In comparison, loss making companies act like a sponge for capital - but unlike such a sponge they do not always produce something when squeezed.
View our latest analysis for Beijing Enterprises Water Group
How Fast Is Beijing Enterprises Water Group Growing?
If a company can keep growing earnings per share (EPS) long enough, its share price will eventually follow. It's no surprise, then, that I like to invest in companies with EPS growth. Impressively, Beijing Enterprises Water Group has grown EPS by 19% per year, compound, in the last three years. If the company can sustain that sort of growth, we'd expect shareholders to come away winners.
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. Beijing Enterprises Water Group shareholders can take confidence from the fact that EBIT margins are up from 25% to 30%, 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. Click on the chart to see the exact numbers.
Of course the knack is to find stocks that have their best days in the future, not in the past. You could base your opinion on past performance, of course, but you may also want to check this interactive graph of professional analyst EPS forecasts for Beijing Enterprises Water Group.
Are Beijing Enterprises Water Group Insiders Aligned With All Shareholders?
We would not expect to see insiders owning a large percentage of a HK$47b company like Beijing Enterprises Water Group. But we are reassured by the fact they have invested in the company. Indeed, they have a glittering mountain of wealth invested in it, currently valued at HK$1.4b. This suggests to me that leadership will be very mindful of shareholders' interests when making decisions!