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.
In contrast to all that, many investors prefer to focus on companies like Global Water Resources (NASDAQ:GWRS), which has not only revenues, but also profits. 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.
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. Global Water Resources managed to grow EPS by 8.5% per year, over three years. That's a good rate of growth, if it can be sustained.
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. Global Water Resources maintained stable EBIT margins over the last year, all while growing revenue 7.6% to US$43m. That's progress.
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.
NasdaqGM:GWRS Earnings and Revenue History July 9th 2022
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 Global Water Resources' balance sheet strength, before getting too excited.
Are Global Water Resources Insiders Aligned With All Shareholders?
It's said that there's no smoke without fire. For investors, insider buying is often the smoke that indicates which stocks could set the market alight. That's because insider buying often indicates that those closest to the company have confidence that the share price will perform well. However, small purchases are not always indicative of conviction, and insiders don't always get it right.
It's pleasing to note that insiders spent US$1.6m buying Global Water Resources shares, over the last year, without reporting any share sales whatsoever. Buying like that is a fantastic look for the company and should rouse the market in anticipation for the future. We also note that it was the Director, Andrew Cohn, who made the biggest single acquisition, paying US$587k for shares at about US$16.00 each.
The good news, alongside the insider buying, for Global Water Resources bulls is that insiders (collectively) have a meaningful investment in the stock. As a matter of fact, their holding is valued at US$47m. This considerable investment should help drive long-term value in the business. Those holdings account for over 15% of the company; visible skin in the game.
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. That's because on our analysis the CEO, Ron Fleming, is paid less than the median for similar sized companies. For companies with market capitalisations between US$200m and US$800m, like Global Water Resources, the median CEO pay is around US$2.8m.
The CEO of Global Water Resources only received US$723k in total compensation for the year ending December 2021. That's clearly well below average, so at a glance that arrangement seems generous to shareholders and points to a modest remuneration culture. 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 Global Water Resources Worth Keeping An Eye On?
One positive for Global Water Resources is that it is growing EPS. That's nice to see. On top of that, we've seen insiders buying shares even though they already own plenty. These factors alone make the company an interesting prospect for your watchlist, as well as continuing research. Before you take the next step you should know about the 4 warning signs for Global Water Resources (2 are a bit concerning!) that we have uncovered.
There are plenty of other companies that have insiders buying up shares. So if you like the sound of Global Water Resources, 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.
Have feedback on this article? Concerned about the content?Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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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