Investors are often guided by the idea of discovering 'the next big thing', even if that means buying 'story stocks' without any revenue, let alone profit. Unfortunately, these high risk investments often have little probability of ever paying off, and many investors pay a price to learn their lesson. Loss making companies can act like a sponge for capital - so investors should be cautious that they're not throwing good money after bad.
Despite being in the age of tech-stock blue-sky investing, many investors still adopt a more traditional strategy; buying shares in profitable companies like Finexia Financial Group (ASX:FNX). Even if this company is fairly valued by the market, investors would agree that generating consistent profits will continue to provide Finexia Financial Group with the means to add long-term value to shareholders.
See our latest analysis for Finexia Financial Group
Finexia Financial Group's Improving Profits
Over the last three years, Finexia Financial Group has grown earnings per share (EPS) at as impressive rate from a relatively low point, resulting in a three year percentage growth rate that isn't particularly indicative of expected future performance. Thus, it makes sense to focus on more recent growth rates, instead. Outstandingly, Finexia Financial Group's EPS shot from AU$0.042 to AU$0.10, over the last year. It's not often a company can achieve year-on-year growth of 140%. Shareholders will be hopeful that this is a sign of the company reaching an inflection point.
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 Finexia Financial Group's revenue from operations was lower than its revenue in the last twelve months, so that could distort our analysis of its margins. Finexia Financial Group maintained stable EBIT margins over the last year, all while growing revenue 83% to AU$8.3m. That's encouraging news for the company!
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.
Finexia Financial Group isn't a huge company, given its market capitalisation of AU$12m. That makes it extra important to check on its balance sheet strength.
Are Finexia Financial 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, small purchases are not always indicative of conviction, and insiders don't always get it right.
It's nice to see that there have been no reports of any insiders selling shares in Finexia Financial Group in the previous 12 months. So it's definitely nice that Executive Chairman Neil Sheather bought AU$30k worth of shares at an average price of around AU$0.30. It seems that at least one insider is prepared to show the market there is potential within Finexia Financial Group.
And the insider buying isn't the only sign of alignment between shareholders and the board, since Finexia Financial Group insiders own more than a third of the company. Owning 37% of the company, insiders have plenty riding on the performance of the the share price. Those who are comforted by solid insider ownership like this should be happy, as it implies that those running the business are genuinely motivated to create shareholder value. Valued at only AU$12m Finexia Financial Group is really small for a listed company. That means insiders only have AU$4.5m worth of shares, despite the large proportional holding. That's not a huge stake in absolute terms, but it should help keep insiders aligned with other shareholders.
While insiders are apparently happy to hold and accumulate shares, that is just part of the big picture. The cherry on top is that the CEO, Neil Sheather is paid comparatively modestly to CEOs at similar sized companies. For companies with market capitalisations under AU$289m, like Finexia Financial Group, the median CEO pay is around AU$427k.
Finexia Financial Group's CEO took home a total compensation package worth AU$274k in the year leading up to June 2022. That seems pretty reasonable, especially given it's below the median for similar sized companies. CEO remuneration levels are not the most important metric for investors, but when the pay is modest, that does support enhanced alignment between the CEO and the ordinary shareholders. It can also be a sign of a culture of integrity, in a broader sense.
Should You Add Finexia Financial Group To Your Watchlist?
Finexia Financial Group's earnings have taken off in quite an impressive fashion. The cherry on top is that insiders own a bunch of shares, and one has been buying more. These factors seem to indicate the company's potential and that it has reached an inflection point. We'd suggest Finexia Financial Group belongs near the top of your watchlist. Even so, be aware that Finexia Financial Group is showing 3 warning signs in our investment analysis , and 2 of those don't sit too well with us...
There are plenty of other companies that have insiders buying up shares. So if you like the sound of Finexia Financial 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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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