In This Article:
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 the reality is that when a company loses money each year, for long enough, its investors will usually take their share of those losses. 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.
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 Advanced Braking Technology (ASX:ABV). 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.
View our latest analysis for Advanced Braking Technology
Advanced Braking Technology's Earnings Per Share Are Growing
If you believe that markets are even vaguely efficient, then over the long term you'd expect a company's share price to follow its earnings per share (EPS) outcomes. Therefore, there are plenty of investors who like to buy shares in companies that are growing EPS. Recognition must be given to the that Advanced Braking Technology has grown EPS by 54% per year, over the last three years. Growth that fast may well be fleeting, but it should be more than enough to pique the interest of the wary stock pickers.
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. While we note Advanced Braking Technology achieved similar EBIT margins to last year, revenue grew by a solid 12% to AU$14m. That's a real positive.
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.
Advanced Braking Technology isn't a huge company, given its market capitalisation of AU$26m. That makes it extra important to check on its balance sheet strength.
Are Advanced Braking Technology Insiders Aligned With All Shareholders?
Investors are always searching for a vote of confidence in the companies they hold and insider buying is one of the key indicators for optimism on the market. Because often, the purchase of stock is a sign that the buyer views it as undervalued. However, small purchases are not always indicative of conviction, and insiders don't always get it right.
Even though some insiders sold down their holdings, their actions speak louder than words with AU$430k more invested than sold by people who know they company best. You could argue that level of buying implies genuine confidence in the business. We also note that it was the company insider, Keith Knowles, who made the biggest single acquisition, paying AU$350k for shares at about AU$0.055 each.