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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. But as Peter Lynch said in One Up On Wall Street, 'Long shots almost never pay off.' A loss-making company is yet to prove itself with profit, and eventually the inflow of external capital may dry up.
In contrast to all that, many investors prefer to focus on companies like BAE Systems (LON:BA.), which has not only revenues, but also profits. Even if this company is fairly valued by the market, investors would agree that generating consistent profits will continue to provide BAE Systems with the means to add long-term value to shareholders.
Check out our latest analysis for BAE Systems
How Fast Is BAE Systems 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. That makes EPS growth an attractive quality for any company. Over the last three years, BAE Systems has grown EPS by 5.8% per year. That might not be particularly high growth, but it does show that per-share earnings are moving steadily in the right direction.
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. EBIT margins for BAE Systems remained fairly unchanged over the last year, however the company should be pleased to report its revenue growth for the period of 14% to UK£26b. 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.
Of course the knack is to find stocks that have their best days in the future, not in the past. You could base your opinion on past performance, of course, but you may also want to check this interactive graph of professional analyst EPS forecasts for BAE Systems.
Are BAE Systems Insiders Aligned With All Shareholders?
We would not expect to see insiders owning a large percentage of a UK£47b company like BAE Systems. But we do take comfort from the fact that they are investors in the company. To be specific, they have UK£37m worth of shares. That shows significant buy-in, and may indicate conviction in the business strategy. Despite being just 0.08% of the company, the value of that investment is enough to show insiders have plenty riding on the venture.
Should You Add BAE Systems To Your Watchlist?
One important encouraging feature of BAE Systems is that it is growing profits. If that's not enough on its own, there is also the rather notable levels of insider ownership. These two factors are a huge highlight for the company which should be a strong contender your watchlists. It's still necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with BAE Systems , and understanding it should be part of your investment process.