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. Sometimes these stories can cloud the minds of investors, leading them to invest with their emotions rather than on the merit of good company fundamentals. A loss-making company is yet to prove itself with profit, and eventually the inflow of external capital may dry up.
So if this idea of high risk and high reward doesn't suit, you might be more interested in profitable, growing companies, like Koss (NASDAQ:KOSS). Now this is not to say that the company presents the best investment opportunity around, but profitability is a key component to success in business.
Koss' Earnings Per Share Are Growing
Generally, companies experiencing growth in earnings per share (EPS) should see similar trends in share price. That means EPS growth is considered a real positive by most successful long-term investors. Shareholders will be happy to know that Koss' EPS has grown 21% each year, compound, over three years. So it's not surprising to see the company trades on a very high multiple of (past) earnings.
Careful consideration of revenue growth and earnings before interest and taxation (EBIT) margins can help inform a view on the sustainability of the recent profit growth. The music to the ears of Koss shareholders is that EBIT margins have grown from -3.1% to 4.5% in the last 12 months and revenues are on an upwards trend as well. That's great to see, on both counts.
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 Koss is no giant, with a market capitalisation of US$79m, you should definitely check its cash and debt before getting too excited about its prospects.
Are Koss 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. Because often, the purchase of stock is a sign that the buyer views it as undervalued. However, insiders are sometimes wrong, and we don't know the exact thinking behind their acquisitions.
With strong conviction, Koss insiders have stood united by refusing to sell shares over the last year. But more importantly, Independent Director William Sweasy spent US$140k acquiring shares, doing so at an average price of US$7.01. It seems at least one insider has seen potential in the company's future - and they're willing to put money on the line.
It's commendable to see that insiders have been buying shares in Koss, but there is more evidence of shareholder friendly management. 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 Koss, with market caps under US$200m is around US$768k.
The Koss CEO received US$549k in compensation for the year ending June 2021. That comes in below the average for similar sized companies and seems pretty reasonable. 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 good governance, more generally.
Does Koss Deserve A Spot On Your Watchlist?
For growth investors, Koss' raw rate of earnings growth is a beacon in the night. And that's not the only positive either. We have both insider buying and reasonable and remuneration to consider. On balance the message seems to be that this stock is worth looking at, at least for a while. However, before you get too excited we've discovered 4 warning signs for Koss (1 doesn't sit too well with us!) that you should be aware of.
The good news is that Koss 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.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
