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Investors are often guided by the idea of discovering 'the next big thing', even if that means buying 'story stocks' without any revenue, let alone profit. 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 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 Step One Clothing (ASX:STP). Now this is not to say that the company presents the best investment opportunity around, but profitability is a key component to success in business.
View our latest analysis for Step One Clothing
Step One Clothing's Improving Profits
In the last three years Step One Clothing's earnings per share took off; so much so that it's a bit disingenuous to use these figures to try and deduce long term estimates. So it would be better to isolate the growth rate over the last year for our analysis. Step One Clothing's EPS shot up from AU$0.056 to AU$0.074; a result that's bound to keep shareholders happy. That's a impressive gain of 31%.
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. Step One Clothing maintained stable EBIT margins over the last year, all while growing revenue 18% to AU$88m. That's encouraging news for the company!
You can take a look at the company's revenue and earnings growth trend, in the chart below. Click on the chart to see the exact numbers.
Since Step One Clothing is no giant, with a market capitalisation of AU$162m, you should definitely check its cash and debt before getting too excited about its prospects.
Are Step One Clothing Insiders Aligned With All Shareholders?
Theory would suggest that it's an encouraging sign to see high insider ownership of a company, since it ties company performance directly to the financial success of its management. So those who are interested in Step One Clothing will be delighted to know that insiders have shown their belief, holding a large proportion of the company's shares. In fact, they own 63% of the company, so they will share in the same delights and challenges experienced by the ordinary shareholders. This should be seen as a good thing, as it means insiders have a personal interest in delivering the best outcomes for shareholders. To give you an idea, the value of insiders' holdings in the business are valued at AU$102m at the current share price. That's nothing to sneeze at!