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. But as Peter Lynch said in One Up On Wall Street, 'Long shots almost never pay off.' Loss making companies can act like a sponge for capital - so investors should be cautious that they're not throwing good money after bad.
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 African Rainbow Capital Investments (JSE:AIL). Even if this company is fairly valued by the market, investors would agree that generating consistent profits will continue to provide African Rainbow Capital Investments with the means to add long-term value to shareholders.
View our latest analysis for African Rainbow Capital Investments
How Fast Is African Rainbow Capital Investments Growing Its Earnings Per Share?
In the last three years African Rainbow Capital Investments' earnings per share took off; so much so that it's a bit disingenuous to use these figures to try and deduce long term estimates. Thus, it makes sense to focus on more recent growth rates, instead. African Rainbow Capital Investments' EPS shot up from R1.02 to R1.48; a result that's bound to keep shareholders happy. That's a commendable gain of 45%.
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. Our analysis has highlighted that African Rainbow Capital Investments' revenue from operations did not account for all of their revenue in the previous 12 months, so our analysis of its margins might not accurately reflect the underlying business. The good news is that African Rainbow Capital Investments is growing revenues, and EBIT margins improved by 11.1 percentage points to 94%, 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. Click on the chart to see the exact numbers.
While profitability drives the upside, prudent investors always check the balance sheet, too.
Are African Rainbow Capital Investments Insiders Aligned With All Shareholders?
It's pleasing to see company leaders with putting their money on the line, so to speak, because it increases alignment of incentives between the people running the business, and its true owners. So it is good to see that African Rainbow Capital Investments insiders have a significant amount of capital invested in the stock. To be specific, they have R444m worth of shares. That shows significant buy-in, and may indicate conviction in the business strategy. Those holdings account for over 5.5% of the company; visible skin in the game.