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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.
In contrast to all that, I prefer to spend time on companies like Subros (NSE:SUBROS), which has not only revenues, but also profits. Now, I'm not saying that the stock is necessarily undervalued today; but I can't shake an appreciation for the profitability of the business itself. In comparison, loss making companies act like a sponge for capital - but unlike such a sponge they do not always produce something when squeezed.
Check out our latest analysis for Subros
Subros's Improving Profits
In the last three years Subros's earnings per share took off like a rocket; fast, and from a low base. So the actual rate of growth doesn't tell us much. Thus, it makes sense to focus on more recent growth rates, instead. Like a falcon taking flight, Subros's EPS soared from ₹10.66 to ₹15.66, over the last year. That's a impressive gain of 47%.
I like to see top-line growth as an indication that growth is sustainable, and I look for a high earnings before interest and taxation (EBIT) margin to point to a competitive moat (though some companies with low margins also have moats). Subros maintained stable EBIT margins over the last year, all while growing revenue 10% to ₹22b. That's a real positive.
In the chart below, you can see how the company has grown earnings, and revenue, over time. Click on the chart to see the exact numbers.
Since Subros is no giant, with a market capitalization of ₹16b, so you should definitely check its cash and debt before getting too excited about its prospects.
Are Subros Insiders Aligned With All Shareholders?
I like company leaders to have some skin in the game, so to speak, because it increases alignment of incentives between the people running the business, and its true owners. As a result, I'm encouraged by the fact that insiders own Subros shares worth a considerable sum. To be specific, they have ₹2.0b worth of shares. That's a lot of money, and no small incentive to work hard. That amounts to 12% of the company, demonstrating a degree of high-level alignment with shareholders.
Does Subros Deserve A Spot On Your Watchlist?
For growth investors like me, Subros's raw rate of earnings growth is a beacon in the night. Further, the high level of insider buying impresses me, and suggests that I'm not the only one who appreciates the EPS growth. So this is very likely the kind of business that I like to spend time researching, with a view to discerning its true value. Of course, just because Subros is growing does not mean it is undervalued. If you're wondering about the valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.