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. Unfortunately, these high risk investments often have little probability of ever paying off, and many investors pay a price to learn their lesson. A loss-making company is yet to prove itself with profit, and eventually the inflow of external capital may dry up.
If this kind of company isn't your style, you like companies that generate revenue, and even earn profits, then you may well be interested in Lynas Rare Earths (ASX:LYC). 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.
How Fast Is Lynas Rare Earths Growing Its Earnings Per Share?
In business, profits are a key measure of success; and share prices tend to reflect earnings per share (EPS) performance. Which is why EPS growth is looked upon so favourably. Commendations have to be given in seeing that Lynas Rare Earths grew its EPS from AU$0.18 to AU$0.58, in one short year. When you see earnings grow that quickly, it often means good things ahead for the company. Could this be a sign that the business has reached an inflection point?
It's often helpful to take a look at earnings before interest and tax (EBIT) margins, as well as revenue growth, to get another take on the quality of the company's growth. The good news is that Lynas Rare Earths is growing revenues, and EBIT margins improved by 25.1 percentage points to 57%, over the last year. 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. To see the actual numbers, click on the chart.
ASX:LYC Earnings and Revenue History March 30th 2023
Are Lynas Rare Earths Insiders Aligned With All Shareholders?
It's said that there's no smoke without fire. For investors, insider buying is often the smoke that indicates which stocks could set the market alight. 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.
We haven't seen any insiders selling Lynas Rare Earths shares, in the last year. With that in mind, it's heartening that Vanessa Guthrie, the Independent Non-Executive Director of the company, paid AU$40k for shares at around AU$8.01 each. Purchases like this can help the investors understand the views of the management team; in which case they see some potential in Lynas Rare Earths.
Along with the insider buying, another encouraging sign for Lynas Rare Earths is that insiders, as a group, have a considerable shareholding. Indeed, they hold AU$32m worth of its stock. That's a lot of money, and no small incentive to work hard. Even though that's only about 0.5% of the company, it's enough money to indicate alignment between the leaders of the business and ordinary shareholders.
Shareholders have more to smile about than just insiders adding more shares to their already sizeable holdings. The cherry on top is that the CEO, Amanda Lacaze is paid comparatively modestly to CEOs at similar sized companies. The median total compensation for CEOs of companies similar in size to Lynas Rare Earths, with market caps between AU$3.0b and AU$9.6b, is around AU$3.5m.
The Lynas Rare Earths CEO received AU$3.2m in compensation for the year ending June 2022. That seems pretty reasonable, especially given it's below the median for similar sized companies. CEO remuneration levels are not the most important metric for investors, but when the pay is modest, that does support enhanced alignment between the CEO and the ordinary shareholders. It can also be a sign of good governance, more generally.
Is Lynas Rare Earths Worth Keeping An Eye On?
Lynas Rare Earths' earnings have taken off in quite an impressive fashion. To sweeten the deal, insiders have significant skin in the game with one even acquiring more. These factors seem to indicate the company's potential and that it has reached an inflection point. We'd suggest Lynas Rare Earths belongs near the top of your watchlist. Before you take the next step you should know about the 2 warning signs for Lynas Rare Earths (1 is a bit unpleasant!) that we have uncovered.
Please note the insider transactions discussed in this article refer to reportable transactions in the relevant jurisdiction.
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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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