It's only natural that many investors, especially those who are new to the game, prefer to buy shares in 'sexy' stocks with a good story, even if those businesses lose money. But as Warren Buffett has mused, 'If you've been playing poker for half an hour and you still don't know who the patsy is, you're the patsy.' When they buy such story stocks, investors are all too often the patsy.
If, on the other hand, you like companies that have revenue, and even earn profits, then you may well be interested in Yanzhou Coal Mining (HKG:1171). Even if the shares are fully valued today, most capitalists would recognize its profits as the demonstration of steady value generation. 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.
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Yanzhou Coal Mining's Improving Profits
In the last three years Yanzhou Coal Mining's earnings per share took off like a rocket; fast, and from a low base. So the actual rate of growth doesn't tell us much. As a result, I'll zoom in on growth over the last year, instead. Yanzhou Coal Mining boosted its trailing twelve month EPS from CN¥1.46 to CN¥1.63, in the last year. That's a 11% gain; respectable growth in the broader scheme of things.
I like to see top-line growth as an indication that growth is sustainable, and I look for a high earnings before interest and taxation (EBIT) margin to point to a competitive moat (though some companies with low margins also have moats). Not all of Yanzhou Coal Mining'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 Yanzhou Coal Mining's EBIT margins were flat over the last year, revenue grew by a solid 24% to CN¥179b. That's a real positive.
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 Yanzhou Coal Mining's future profits.
Are Yanzhou Coal Mining Insiders Aligned With All Shareholders?
We would not expect to see insiders owning a large percentage of a CN¥51b company like Yanzhou Coal Mining. But we are reassured by the fact they have invested in the company. Indeed, they hold CN¥138m worth of its stock. That's a lot of money, and no small incentive to work hard. Despite being just 0.3% of the company, the value of that investment is enough to show insiders have plenty riding on the venture.
It's good to see that insiders are invested in the company, but are remuneration levels reasonable? A brief analysis of the CEO compensation suggests they are. For companies with market capitalizations between CN¥28b and CN¥83b, like Yanzhou Coal Mining, the median CEO pay is around CN¥2.6m.
The CEO of Yanzhou Coal Mining only received CN¥1.1m in total compensation for the year ending December 2018. That looks like modest pay to me, and may hint at a certain respect for the interests of shareholders. 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.
Is Yanzhou Coal Mining Worth Keeping An Eye On?
One important encouraging feature of Yanzhou Coal Mining is that it is growing profits. The fact that EPS is growing is a genuine positive for Yanzhou Coal Mining, but the pretty picture gets better than that. With a meaningful level of insider ownership, and reasonable CEO pay, a reasonable mind might conclude that this is one stock worth watching. Of course, profit growth is one thing but it's even better if Yanzhou Coal Mining is receiving high returns on equity, since that should imply it can keep growing without much need for capital. Click on this link to see how it is faring against the average 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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