For beginners, it can seem like a good idea (and an exciting prospect) to buy a company that tells a good story to investors, even if it currently lacks a track record of revenue and profit. 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 CFM Holdings (Catalist:5EB). While this doesn't necessarily speak to whether it's undervalued, the profitability of the business is enough to warrant some appreciation - especially if its growing.

Check out our latest analysis for CFM Holdings

CFM Holdings' Improving Profits

Strong earnings per share (EPS) results are an indicator of a company achieving solid profits, which investors look upon favourably and so the share price tends to reflect great EPS performance. Which is why EPS growth is looked upon so favourably. Commendations have to be given in seeing that CFM Holdings grew its EPS from S$0.0094 to S$0.052, in one short year. When you see earnings grow that quickly, it often means good things ahead for the company.

Top-line growth is a great indicator that growth is sustainable, and combined with a high earnings before interest and taxation (EBIT) margin, it's a great way for a company to maintain a competitive advantage in the market. The good news is that CFM Holdings is growing revenues, and EBIT margins improved by 2.3 percentage points to 9.7%, over the last year. That's great to see, on both counts.

In the chart below, you can see how the company has grown earnings and revenue, over time. To see the actual numbers, click on the chart.

CFM Holdings isn't a huge company, given its market capitalisation of S$18m. That makes it extra important to check on its balance sheet strength.

Are CFM Holdings Insiders Aligned With All Shareholders?

Many consider high insider ownership to be a strong sign of alignment between the leaders of a company and the ordinary shareholders. So as you can imagine, the fact that CFM Holdings insiders own a significant number of shares certainly is appealing. Indeed, with a collective holding of 70%, company insiders are in control and have plenty of capital behind the venture. This should be seen as a good thing, as it means insiders have a personal interest in delivering the best outcomes for shareholders. Valued at only S$18m CFM Holdings is really small for a listed company. That means insiders only have S$12m worth of shares, despite the large proportional holding. That might not be a huge sum but it should be enough to keep insiders motivated!

Should You Add CFM Holdings To Your Watchlist?

CFM Holdings' earnings per share growth have been climbing higher at an appreciable rate. This level of EPS growth does wonders for attracting investment, and the large insider investment in the company is just the cherry on top. The hope is, of course, that the strong growth marks a fundamental improvement in the business economics. So based on this quick analysis, we do think it's worth considering CFM Holdings for a spot on your watchlist. You should always think about risks though. Case in point, we've spotted 4 warning signs for CFM Holdings you should be aware of, and 1 of them is a bit unpleasant.

Although CFM Holdings certainly looks good, it may appeal to more investors if insiders were buying up shares. If you like to see insider buying, then this free list 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.