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 completely lacks a track record of revenue and profit. And in their study titled Who Falls Prey to the Wolf of Wall Street?' Leuz et. al. found that it is 'quite common' for investors to lose money by buying into 'pump and dump' schemes.
If, on the other hand, you like companies that have revenue, and even earn profits, then you may well be interested in EEKA Fashion Holdings (HKG:3709). While that doesn't make the shares worth buying at any price, you can't deny that successful capitalism requires profit, eventually. Conversely, a loss-making company is yet to prove itself with profit, and eventually the sweet milk of external capital may run sour.
EEKA Fashion Holdings's Earnings Per Share Are Growing.
If a company can keep growing earnings per share (EPS) long enough, its share price will eventually follow. Therefore, there are plenty of investors who like to buy shares in companies that are growing EPS. EEKA Fashion Holdings managed to grow EPS by 8.9% per year, over three years. That's a pretty good rate, if the company can sustain it.
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. EEKA Fashion Holdings maintained stable EBIT margins over the last year, all while growing revenue 6.2% to CN¥2.6b. That's a real positive.
You can take a look at the company's revenue and earnings growth trend, in the chart below. To see the actual numbers, click on the chart.
SEHK:3709 Income Statement, December 20th 2019
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 EEKA Fashion Holdings's balance sheet strength, before getting too excited.
Are EEKA Fashion Holdings Insiders Aligned With All Shareholders?
Like the kids in the streets standing up for their beliefs, insider share purchases give me reason to believe in a brighter future. Because oftentimes, 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 there was some insider selling over the last year, that was outweighed by Executive Director Rui Jin's huge outlay of CN¥1.9b, spent buying shares. The average price paid was about CN¥9.50. The quantum of that insider purchase is both rare and a sight to behold, not unlike an endangered Amur Leopard in the wild.
On top of the insider buying, we can also see that EEKA Fashion Holdings insiders own a large chunk of the company. In fact, they own 73% of the company, so they will share in the same delights and challenges experienced by the ordinary shareholders. This makes me think they will be incentivised to plan for the long term - something I like to see. And their holding is extremely valuable at the current share price, totalling CN¥4.5b. That means they have plenty of their own capital riding on the performance of the business!
While insiders already own a significant amount of shares, and they have been buying more, the good news for ordinary shareholders does not stop there. The cherry on top is that the CEO, Ming Jin is paid comparatively modestly to CEOs at similar sized companies. For companies with market capitalizations between CN¥2.8b and CN¥11b, like EEKA Fashion Holdings, the median CEO pay is around CN¥3.4m.
The CEO of EEKA Fashion Holdings only received CN¥1.5m in total compensation for the year ending December 2018. That looks like modest pay to me, and may hint at a certain respect for the interests of shareholders. CEO remuneration levels are not the most important metric for investors, but when the pay is modest, that does support enhanced alignment between the CEO and the ordinary shareholders. It can also be a sign of a culture of integrity, in a broader sense.
Is EEKA Fashion Holdings Worth Keeping An Eye On?
One important encouraging feature of EEKA Fashion Holdings is that it is growing profits. On top of that, we've seen insiders buying shares even though they already own plenty. That makes the company a prime candidate for my watchlist - and arguably a research priority. If you think EEKA Fashion Holdings 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.
There are plenty of other companies that have insiders buying up shares. So if you like the sound of EEKA Fashion Holdings, you'll probably love this freelist of growing companies that insiders are buying.
Please note the insider transactions discussed in this article refer to reportable transactions in the relevant jurisdiction
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
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