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 Hong Leong Finance (SGX:S41). While this doesn’t necessarily speak to whether it’s undervalued, the profitability of the business is enough to warrant some appreciation – especially if its growing.
See our latest analysis for Hong Leong Finance
How Quickly Is Hong Leong Finance Increasing Earnings Per Share?
The market is a voting machine in the short term, but a weighing machine in the long term, so you’d expect share price to follow earnings per share (EPS) outcomes eventually. So it makes sense that experienced investors pay close attention to company EPS when undertaking investment research. We can see that in the last three years Hong Leong Finance grew its EPS by 15% per year. That’s a pretty good rate, if the company can sustain it.
Top-line growth is a great indicator that growth is sustainable, and combined with a high earnings before interest and taxation (EBIT) margin, it’s a great way for a company to maintain a competitive advantage in the market. It’s noted that Hong Leong Finance’s revenue from operations was lower than its revenue in the last twelve months, so that could distort our analysis of its margins. EBIT margins for Hong Leong Finance remained fairly unchanged over the last year, however the company should be pleased to report its revenue growth for the period of 34% to S$262m. That’s progress.
In the chart below, you can see how the company has grown earnings and revenue, over time. For finer detail, click on the image.
While profitability drives the upside, prudent investors always check the balance sheet, too.
Are Hong Leong Finance Insiders Aligned With All Shareholders?
It’s pleasing to see company leaders with putting their money on the line, so to speak, because it increases alignment of incentives between the people running the business, and its true owners. So it is good to see that Hong Leong Finance insiders have a significant amount of capital invested in the stock. Indeed, they hold S$45m worth of its stock. This considerable investment should help drive long-term value in the business. While their ownership only accounts for 3.9%, this is still a considerable amount at stake to encourage the business to maintain a strategy that will deliver value to shareholders.
Is Hong Leong Finance Worth Keeping An Eye On?
As previously touched on, Hong Leong Finance is a growing business, which is encouraging. If that’s not enough on its own, there is also the rather notable levels of insider ownership. That combination is very appealing. So yes, we do think the stock is worth keeping an eye on. Don’t forget that there may still be risks. For instance, we’ve identified 2 warning signs for Hong Leong Finance that you should be aware of.
There’s always the possibility of doing well buying stocks that are not growing earnings and do not have insiders buying shares. But for those who consider these important metrics, we encourage you to check out companies that do have those features. You can access a tailored list of Singaporean companies which have demonstrated growth backed by recent insider purchases.
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.
