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Some have more dollars than sense, they say, so even companies that have no revenue, no profit, and a record of falling short, can easily find investors. 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 Southern Cross Electrical Engineering (ASX:SXE), which has not only revenues, but also profits. While profit is not necessarily a social good, it's easy to admire a business that can consistently produce it. Loss-making companies are always racing against time to reach financial sustainability, but time is often a friend of the profitable company, especially if it is growing.
See our latest analysis for Southern Cross Electrical Engineering
How Quickly Is Southern Cross Electrical Engineering Increasing Earnings Per Share?
The market is a voting machine in the short term, but a weighing machine in the long term, so share price follows earnings per share (EPS) eventually. It's no surprise, then, that I like to invest in companies with EPS growth. Over the last three years, Southern Cross Electrical Engineering has grown EPS by 11% per year. That's a good rate of growth, if it can be sustained.
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). While Southern Cross Electrical Engineering may have maintained EBIT margins over the last year, revenue has fallen. And that does make me a little more cautious of the stock.
The chart below shows how the company's bottom and top lines have progressed over time. To see the actual numbers, click on the chart.
Southern Cross Electrical Engineering isn't a huge company, given its market capitalization of AU$158m. That makes it extra important to check on its balance sheet strength.
Are Southern Cross Electrical Engineering 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 Southern Cross Electrical Engineering shares worth a considerable sum. Indeed, they hold AU$38m worth of its stock. That shows significant buy-in, and may indicate conviction in the business strategy. Those holdings account for over 24% of the company; visible skin in the game.