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.' Loss making companies can act like a sponge for capital - so investors should be cautious that they're not throwing good money after bad.
So if this idea of high risk and high reward doesn't suit, you might be more interested in profitable, growing companies, like Literacy Capital (LON:BOOK). Even if this company is fairly valued by the market, investors would agree that generating consistent profits will continue to provide Literacy Capital with the means to add long-term value to shareholders.
See our latest analysis for Literacy Capital
Literacy Capital's Improving Profits
Even modest earnings per share growth (EPS) can create meaningful value, when it is sustained reliably from year to year. So it's easy to see why many investors focus in on EPS growth. Literacy Capital boosted its trailing twelve month EPS from UK£1.01 to UK£1.15, in the last year. This amounts to a 14% gain; a figure that shareholders will be pleased to see.
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. It's noted that Literacy Capital's revenue from operations was lower than its revenue in the last twelve months, so that could distort our analysis of its margins. Literacy Capital maintained stable EBIT margins over the last year, all while growing revenue 22% to UK£74m. That's a real positive.
In the chart below, you can see how the company has grown earnings and revenue, over time. To see the actual numbers, click on the chart.
Since Literacy Capital is no giant, with a market capitalisation of UK£224m, you should definitely check its cash and debt before getting too excited about its prospects.
Are Literacy Capital Insiders Aligned With All Shareholders?
Insider interest in a company always sparks a bit of intrigue and many investors are on the lookout for companies where insiders are putting their money where their mouth is. 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.
First things first, there weren't any reports of insiders selling shares in Literacy Capital in the last 12 months. But the important part is that Independent Non-Executive Director Christopher Sellers spent UK£416k buying stock, at an average price of UK£3.47. It seems at least one insider thinks that the company is doing well - and they are backing that view with cash.
These recent buys aren't the only encouraging sign for shareholders, as a look at the shareholder registry for Literacy Capital will reveal that insiders own a significant piece of the pie. Indeed, with a collective holding of 69%, company insiders are in control and have plenty of capital behind the venture. This makes it apparent they will be incentivised to plan for the long term - a positive for shareholders with a sit and hold strategy. In terms of absolute value, insiders have UK£155m invested in the business, at the current share price. That's nothing to sneeze at!
Is Literacy Capital Worth Keeping An Eye On?
As previously touched on, Literacy Capital is a growing business, which is encouraging. Better yet, insiders are significant shareholders, and have been buying more shares. These factors alone make the company an interesting prospect for your watchlist, as well as continuing research. What about risks? Every company has them, and we've spotted 1 warning sign for Literacy Capital you should know about.
Keen growth investors love to see insider buying. Thankfully, Literacy Capital 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.
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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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