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For beginners, it can seem like a good idea (and an exciting prospect) to buy a company that tells a good story to investors, even if it completely lacks a track record of revenue and profit. Unfortunately, high risk investments often have little probability of ever paying off, and many investors pay a price to learn their lesson.
In the age of tech-stock blue-sky investing, my choice may seem old fashioned; I still prefer profitable companies like ESSA Bancorp ( NASDAQ:ESSA ). Now, I'm not saying that the stock is necessarily undervalued today; but I can't shake an appreciation for the profitability of the business itself. Conversely, a loss-making company is yet to prove itself with profit, and eventually the sweet milk of external capital may run sour.
How Quickly Is ESSA Bancorp Increasing Earnings Per Share?
If a company can keep growing earnings per share (EPS) long enough, its share price will eventually follow. That makes EPS growth an attractive quality for any company. Over the last three years, ESSA Bancorp has grown EPS by 8.3% per year. That's a pretty good rate, if the company can sustain it.
I like to take a look at earnings before interest and (EBIT) tax margins, as well as revenue growth, to get another take on the quality of the company's growth. Not all of ESSA Bancorp's revenue this year is revenue from operations , so keep in mind the revenue and margin numbers I've used might not be the best representation of the underlying business. While we note ESSA Bancorp's EBIT margins were flat over the last year, revenue grew by a solid 4.9% to US$53m. That's progress.
The chart below shows how the company's bottom and top lines have progressed over time. To see the actual numbers, click on the chart.
Since ESSA Bancorp is no giant, with a market capitalization of US$168m, so you should definitely check its cash and debt before getting too excited about its prospects.
Are ESSA Bancorp Insiders Aligned With All Shareholders?
It makes me feel more secure owning shares in a company if insiders also own shares, thusly more closely aligning our interests. So it is good to see that ESSA Bancorp insiders have a significant amount of capital invested in the stock. To be specific, they have US$14m worth of shares. That's a lot of money, and no small incentive to work hard. That amounts to 8.5% of the company, demonstrating a degree of high-level alignment with shareholders.
It means a lot to see insiders invested in the business, but I find myself wondering if remuneration policies are shareholder friendly. A brief analysis of the CEO compensation suggests they are. I discovered that the median total compensation for the CEOs of companies like ESSA Bancorp with market caps between US$100m and US$400m is about US$1.2m.
The ESSA Bancorp CEO received US$724k in compensation for the year ending September 2018. That seems pretty reasonable, especially given its below the median for similar sized companies. 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. It can also be a sign of good governance, more generally.
Should You Add ESSA Bancorp To Your Watchlist?
As I already mentioned, ESSA Bancorp is a growing business, which is what I like to see. Earnings growth might be the main game for ESSA Bancorp, but the fun does not stop there. With a meaningful level of insider ownership, and reasonable CEO pay, a reasonable mind might conclude that this is one stock worth watching. Now, you could try to make up your mind on ESSA Bancorp by focusing on just these factors, or you could also consider how its price-to-earnings ratio compares to other companies in its industry .
Of course, you can do well (sometimes) buying stocks that are not growing earnings and do not have insiders buying shares. But as a growth investor I always like to check out companies that do have those features. You can access 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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If you spot an error that warrants correction, please contact the editor at email@example.com . This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.