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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 Peter Lynch said in One Up On Wall Street, 'Long shots almost never pay off.'
In the age of tech-stock blue-sky investing, my choice may seem old fashioned; I still prefer profitable companies like Electro Optic Systems Holdings (ASX:EOS). While that doesn't make the shares worth buying at any price, you can't deny that successful capitalism requires profit, eventually. Loss-making companies are always racing against time to reach financial sustainability, but time is often a friend of the profitable company, especially if it is growing.
View our latest analysis for Electro Optic Systems Holdings
Electro Optic Systems Holdings's Improving Profits
In the last three years Electro Optic Systems Holdings's earnings per share took off like a rocket; fast, and from a low base. So the actual rate of growth doesn't tell us much. As a result, I'll zoom in on growth over the last year, instead. Electro Optic Systems Holdings boosted its trailing twelve month EPS from AU$0.17 to AU$0.20, in the last year. That's a 14% gain; respectable growth in the broader scheme of things.
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. Electro Optic Systems Holdings shareholders can take confidence from the fact that EBIT margins are up from 8.5% to 13%, and revenue is growing. Ticking those two boxes is a good sign of growth, in my book.
You can take a look at the company's revenue and earnings growth trend, in the chart below. Click on the chart to see the exact numbers.
While it's always good to see growing profits, you should always remember that a weak balance sheet could come back to bite. So check Electro Optic Systems Holdings's balance sheet strength, before getting too excited.
Are Electro Optic Systems Holdings Insiders Aligned With All Shareholders?
It makes me feel more secure owning shares in a company if insiders also own shares, thusly more closely aligning our interests. So it is good to see that Electro Optic Systems Holdings insiders have a significant amount of capital invested in the stock. Notably, they have an enormous stake in the company, worth AU$149m. That equates to 17% of the company, making insiders powerful and aligned with other shareholders. Very encouraging.
Does Electro Optic Systems Holdings Deserve A Spot On Your Watchlist?
As I already mentioned, Electro Optic Systems Holdings is a growing business, which is what I like to see. If that's not enough on its own, there is also the rather notable levels of insider ownership. The combination sparks joy for me, so I'd consider keeping the company on a watchlist. We don't want to rain on the parade too much, but we did also find 3 warning signs for Electro Optic Systems Holdings (2 can't be ignored!) that you need to be mindful of.