The excitement of investing in a company that can reverse its fortunes is a big draw for some speculators, so even companies that have no revenue, no profit, and a record of falling short, can manage to find investors. Unfortunately, these high risk investments often have little probability of ever paying off, and many investors pay a price to learn their lesson. Loss-making companies are always racing against time to reach financial sustainability, so investors in these companies may be taking on more risk than they should.
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 WiseTech Global (ASX:WTC). 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.
If a company can keep growing earnings per share (EPS) long enough, its share price should eventually follow. That makes EPS growth an attractive quality for any company. Shareholders will be happy to know that WiseTech Global's EPS has grown 34% each year, compound, over three years. This has no doubt fuelled the optimism that sees the stock trading on a high multiple of earnings.
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. The music to the ears of WiseTech Global shareholders is that EBIT margins have grown from 35% to 42% in the last 12 months and revenues are on an upwards trend as well. 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. For finer detail, click on the image.
ASX:WTC Earnings and Revenue History July 29th 2023
Are WiseTech Global Insiders Aligned With All Shareholders?
Since WiseTech Global has a market capitalisation of AU$28b, we wouldn't expect insiders to hold a large percentage of shares. But we do take comfort from the fact that they are investors in the company. Notably, they have an enviable stake in the company, worth AU$2.7b. Holders should find this level of insider commitment quite encouraging, since it would ensure that the leaders of the company would also experience their success, or failure, with the stock.
It means a lot to see insiders invested in the business, but shareholders may be wondering if remuneration policies are in their best interest. Well, based on the CEO pay, you'd argue that they are indeed. For companies with market capitalisations over AU$12b, like WiseTech Global, the median CEO pay is around AU$5.7m.
The CEO of WiseTech Global only received AU$1.1m in total compensation for the year ending June 2022. That looks like a modest pay packet, and may hint at a certain respect for the interests of shareholders. While the level of CEO compensation shouldn't be the biggest factor in how the company is viewed, modest remuneration is a positive, because it suggests that the board keeps shareholder interests in mind. Generally, arguments can be made that reasonable pay levels attest to good decision-making.
Does WiseTech Global Deserve A Spot On Your Watchlist?
If you believe that share price follows earnings per share you should definitely be delving further into WiseTech Global's strong EPS growth. If you need more convincing beyond that EPS growth rate, don't forget about the reasonable remuneration and the high insider ownership. The overarching message here is that WiseTech Global has underlying strengths that make it worth a look at. If you think WiseTech Global might suit your style as an investor, you could go straight to its annual report, or you could first check our discounted cash flow (DCF) valuation for the company.
Although WiseTech Global certainly looks good, it may appeal to more investors if insiders were buying up shares. If you like to see insider buying, then this freelist of growing companies that insiders are buying, could be exactly what you're looking for.
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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