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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. Unfortunately, high risk investments often have little probability of ever paying off, and many investors pay a price to learn their lesson.
So if you’re like me, you might be more interested in profitable, growing companies, like Royal Mail (LON:RMG). While that doesn’t make the shares worth buying at any price, you can’t deny that successful capitalism requires profit, eventually. While a well funded company may sustain losses for years, unless its owners have an endless appetite for subsidizing the customer, it will need to generate a profit eventually, or else breathe its last breath.
Check out our latest analysis for Royal Mail
How Quickly Is Royal Mail 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. Therefore, there are plenty of investors who like to buy shares in companies that are growing EPS. Impressively, Royal Mail has grown EPS by 34% per year, compound, in the last three years. As a general rule, we’d say that if a company can keep up that sort of growth, shareholders will be smiling.
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. The good news is that Royal Mail is growing revenues, and EBIT margins improved by 4.1 percentage points to 7.5%, over the last year. 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. To see the actual numbers, click on the chart.
You don’t drive with your eyes on the rear-view mirror, so you might be more interested in this free report showing analyst forecasts for Royal Mail’s future profits.
Are Royal Mail Insiders Aligned With All Shareholders?
Like that fresh smell in the air when the rains are coming, insider buying fills me with optimistic anticipation. That’s because insider buying often indicates that those closest to the company have confidence that the share price will perform well. Of course, we can never be sure what insiders are thinking, we can only judge their actions.
We haven’t seen any insiders selling Royal Mail shares, in the last year. With that in mind, it’s heartening that Keith Williams, the Independent Non-Executive Chairman & Member of Management Board of the company, paid UK£32k for shares at around UK£4.66 each.
I do like that insiders have been buying shares in Royal Mail, but there is more evidence of shareholder friendly management. Specifically, the CEO is paid quite reasonably for a company of this size. For companies with market capitalizations between UK£2.9b and UK£8.7b, like Royal Mail, the median CEO pay is around UK£1.5m.
The CEO of Royal Mail only received UK£186k in total compensation for the year ending . That’s clearly well below average, so at a glance, that arrangement seems generous to shareholders, and points to a modest remuneration culture. CEO compensation is hardly the most important aspect of a company to consider, but when its reasonable that does give me a little more confidence that leadership are looking out for shareholder interests. I’d also argue reasonable pay levels attest to good decision making more generally.
Is Royal Mail Worth Keeping An Eye On?
Given my belief that share price follows earnings per share you can easily imagine how I feel about Royal Mail’s strong EPS growth. And that’s not the only positive, either. We have both insider buying and reasonable and remuneration to consider. The message I’d take from this quick rundown is that, yes, this stock is worth investigating further. Don’t forget that there may still be risks. For instance, we’ve identified 2 warning signs for Royal Mail that you should be aware of.
The good news is that Royal Mail is not the only growth stock with insider buying. Here’s a list of them… with insider buying in the last three months!
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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