Like a puppy chasing its tail, some new investors often chase ‘the next big thing’, even if that means buying ‘story stocks’ without revenue, let alone profit. But as Warren Buffett has mused, ‘If you’ve been playing poker for half an hour and you still don’t know who the patsy is, you’re the patsy.’ When they buy such story stocks, investors are all too often the patsy.
In the age of tech-stock blue-sky investing, my choice may seem old fashioned; I still prefer profitable companies like Lerthai Group (HKG:112). While that doesn’t make the shares worth buying at any price, you can’t deny that successful capitalism requires profit, eventually. In comparison, loss making companies act like a sponge for capital – but unlike such a sponge they do not always produce something when squeezed.
How Fast Is Lerthai Group Growing Its Earnings Per Share?
In business, though not in life, profits are a key measure of success; and share prices tend to reflect earnings per share (EPS). So like the hint of a smile on a face that I love, growing EPS generally makes me look twice. It is therefore awe-striking that Lerthai Group’s EPS went from HK$0.49 to HK$1.56 in just one year. Even though that growth rate is unlikely to be repeated, that looks like a breakout improvement.
I like to take a look at earnings before interest and (EBIT) tax margins, as well as revenue growth, to get another take on the quality of the company’s growth. I note that Lerthai Group’s revenue from operations was lower than its revenue in the last twelve months, so that could distort my analysis of its margins. Lerthai Group’s EBIT margins have actually improved by 41.1 percentage points in the last year, to reach 43%, but, on the flip side, revenue was down 36%. That falls short of ideal.
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.
While it’s always good to see growing profits, you should always remember that a weak balance sheet could come back to bite. So check Lerthai Group’s balance sheet strength, before getting too excited.
Are Lerthai Group Insiders Aligned With All Shareholders?
Like the kids in the streets standing up for their beliefs, insider share purchases give me reason to believe in a brighter future. That’s because insider buying often indicates that those closest to the company have confidence that the share price will perform well. However, small purchases are not always indicative of conviction, and insiders don’t always get it right.
One gleaming positive for Lerthai Group, in the last year, is that a certain insider has buying shares with ample enthusiasm. In one fell swoop, Vice Chairlady & Co-Chief Executive Officer Yan Zhang, spent HK$5.0m, at a price of HK$7.08 per share. Big insider buys like that are almost as rare as an ocean free of single use plastic waste.
And the insider buying isn’t the only sign of alignment between shareholders and the board, since Lerthai Group insiders own more than a third of the company. In fact, hey own 61% of the company, so they will share in the same delights and challenged experienced by the ordinary shareholders. This makes me think they will be incentivised to plan for the long term – something I like to see. And that holding is extremely valuable at the current share price, totalling HK$3.4b. Now that’s what I call some serious skin in the game!
Is Lerthai Group Worth Keeping An Eye On?
Lerthai Group’s earnings have taken off like any random crypto-currency did, back in 2017. Growth investors should find it difficult to look past that strong EPS move. And indeed, it could be a sign that the business is at an inflection point. For me, this situation certainly piques my interest. Of course, just because Lerthai Group 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.
As a growth investor I do like to see insider buying. But Lerthai Group isn’t the only one. You can see a a free list of them here.
Please note the insider transactions discussed in this article refer to reportable transactions in the relevant jurisdiction
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.
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