With EPS Growth And More, Johns Lyng Group (ASX:JLG) Makes An Interesting Case
Simply Wall St
4 min read
It's common for many investors, especially those who are inexperienced, to buy shares in companies with a good story even if these companies are loss-making. 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 Johns Lyng Group (ASX:JLG), 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 a company can keep growing earnings per share (EPS) long enough, its share price should eventually follow. That means EPS growth is considered a real positive by most successful long-term investors. It certainly is nice to see that Johns Lyng Group has managed to grow EPS by 18% per year over three years. As a result, we can understand why the stock trades on a high multiple of trailing twelve month earnings.
It's often helpful to take a look at earnings before interest and tax (EBIT) margins, as well as revenue growth, to get another take on the quality of the company's growth. EBIT margins for Johns Lyng Group remained fairly unchanged over the last year, however the company should be pleased to report its revenue growth for the period of 57% to AU$895m. That's a real positive.
In the chart below, you can see how the company has grown earnings and revenue, over time. For finer detail, click on the image.
ASX:JLG Earnings and Revenue History August 31st 2022
Are Johns Lyng Group 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 Johns Lyng Group insiders have a significant amount of capital invested in the stock. We note that their impressive stake in the company is worth AU$524m. That equates to 30% of the company, making insiders powerful and aligned with other shareholders. Very encouraging.
It means a lot to see insiders invested in the business, but shareholders may be wondering if remuneration policies are in their best interest. Our quick analysis into CEO remuneration would seem to indicate they are. The median total compensation for CEOs of companies similar in size to Johns Lyng Group, with market caps between AU$1.4b and AU$4.6b, is around AU$2.5m.
The Johns Lyng Group CEO received total compensation of just AU$1.1m in the year to June 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 compensation is hardly the most important aspect of a company to consider, but when it's reasonable, that gives a little more confidence that leadership are looking out for shareholder interests. Generally, arguments can be made that reasonable pay levels attest to good decision-making.
Is Johns Lyng Group Worth Keeping An Eye On?
If you believe that share price follows earnings per share you should definitely be delving further into Johns Lyng Group's strong EPS growth. If you still have your doubts, remember too that company insiders have a considerable investment aligning themselves with the shareholders and CEO pay is quite modest compared to similarly sized companiess. Everyone has their own preferences when it comes to investing but it definitely makes Johns Lyng Group look rather interesting indeed. Don't forget that there may still be risks. For instance, we've identified 2 warning signs for Johns Lyng Group that you should be aware of.
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.
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