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 currently lacks a track record of revenue and profit. Unfortunately, these high risk investments often have little probability of ever paying off, and many investors pay a price to learn their lesson. A loss-making company is yet to prove itself with profit, and eventually the inflow of external capital may dry up.
If this kind of company isn't your style, you like companies that generate revenue, and even earn profits, then you may well be interested in Rave Restaurant Group (NASDAQ:RAVE). Even if this company is fairly valued by the market, investors would agree that generating consistent profits will continue to provide Rave Restaurant Group with the means to add long-term value to shareholders.
View our latest analysis for Rave Restaurant Group
Rave Restaurant Group's Improving Profits
Strong earnings per share (EPS) results are an indicator of a company achieving solid profits, which investors look upon favourably and so the share price tends to reflect great EPS performance. So a growing EPS generally brings attention to a company in the eyes of prospective investors. Commendations have to be given in seeing that Rave Restaurant Group grew its EPS from US$0.087 to US$0.49, in one short year. When you see earnings grow that quickly, it often means good things ahead for the company. This could point to the business hitting a point of inflection.
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. Rave Restaurant Group shareholders can take confidence from the fact that EBIT margins are up from 12% to 23%, and revenue is growing. That's great to see, on both counts.
You can take a look at the company's revenue and earnings growth trend, in the chart below. For finer detail, click on the image.
Rave Restaurant Group isn't a huge company, given its market capitalisation of US$21m. That makes it extra important to check on its balance sheet strength.
Are Rave Restaurant Group Insiders Aligned With All Shareholders?
Investors are always searching for a vote of confidence in the companies they hold and insider buying is one of the key indicators for optimism on the market. That's because insider buying often indicates that those closest to the company have confidence that the share price will perform well. However, insiders are sometimes wrong, and we don't know the exact thinking behind their acquisitions.
Not only did Rave Restaurant Group insiders refrain from selling stock during the year, but they also spent US$81k buying it. That's nice to see, because it suggests insiders are optimistic. It is also worth noting that it was Chairman of the Board Mark Schwarz who made the biggest single purchase, worth US$35k, paying US$0.87 per share.
Recent insider purchases of Rave Restaurant Group stock is not the only way management has kept the interests of the general public shareholders in mind. Specifically, the CEO is paid quite reasonably for a company of this size. The median total compensation for CEOs of companies similar in size to Rave Restaurant Group, with market caps under US$200m is around US$780k.
Rave Restaurant Group's CEO took home a total compensation package worth US$682k in the year leading up to June 2021. That seems pretty reasonable, especially given it's below the median for similar sized companies. While the level of CEO compensation shouldn't be the biggest factor in how the company is viewed, modest remuneration is a positive, because it suggests that the board keeps shareholder interests in mind. Generally, arguments can be made that reasonable pay levels attest to good decision-making.
Is Rave Restaurant Group Worth Keeping An Eye On?
Rave Restaurant Group's earnings per share growth have been climbing higher at an appreciable rate. Better yet, we can observe insider buying and the chief executive pay looks reasonable. It could be that Rave Restaurant Group is at an inflection point, given the EPS growth. If so, then its potential for further gains probably merit a spot on your watchlist. Still, you should learn about the 1 warning sign we've spotted with Rave Restaurant Group.
There are plenty of other companies that have insiders buying up shares. So if you like the sound of Rave Restaurant Group, you'll probably love this free list of growing companies that insiders are buying.
Please note the insider transactions discussed in this article refer to reportable transactions in the relevant jurisdiction.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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