Do Gujarat Alkalies and Chemicals's (NSE:GUJALKALI) Earnings Warrant Your Attention?

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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. But the reality is that when a company loses money each year, for long enough, its investors will usually take their share of those losses.

In contrast to all that, I prefer to spend time on companies like Gujarat Alkalies and Chemicals (NSE:GUJALKALI), which has not only revenues, but also profits. 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.

Check out our latest analysis for Gujarat Alkalies and Chemicals

How Fast Is Gujarat Alkalies and Chemicals Growing?

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. That makes EPS growth an attractive quality for any company. As a tree reaches steadily for the sky, Gujarat Alkalies and Chemicals's EPS has grown 33% each year, compound, over three years. If the company can sustain that sort of growth, we'd expect shareholders to come away winners.

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). The good news is that Gujarat Alkalies and Chemicals is growing revenues, and EBIT margins improved by 10.1 percentage points to 27%, over the last year. Ticking those two boxes is a good sign of growth, in my book.

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.

While it's always good to see growing profits, you should always remember that a weak balance sheet could come back to bite. So check Gujarat Alkalies and Chemicals's balance sheet strength, before getting too excited.

Are Gujarat Alkalies and Chemicals Insiders Aligned With All Shareholders?

As a general rule, I think it worth considering how much the CEO is paid, since unreasonably high rates could be considered against the interests of shareholders. For companies with market capitalizations between ₹14b and ₹56b, like Gujarat Alkalies and Chemicals, the median CEO pay is around ₹22m.

The CEO of Gujarat Alkalies and Chemicals was paid just ₹3.0m in total compensation for the year ending March 2018. This could be considered a token amount, and indicates that the company does not need to use payment to motivate the CEO - that is often a good sign. While the level of CEO compensation isn't a huge factor in my view of the company, modest remuneration is a positive, because it suggests that the board keeps shareholder interests in mind. I'd also argue reasonable pay levels attest to good decision making more generally.

Is Gujarat Alkalies and Chemicals Worth Keeping An Eye On?

For growth investors like me, Gujarat Alkalies and Chemicals's raw rate of earnings growth is a beacon in the night. The fast growth bodes well while the very reasonable CEO pay assists builds some confidence in the board. So I'd argue this is the kind of stock worth watching, even if it isn't great value today. Of course, just because Gujarat Alkalies and Chemicals is growing does not mean it is undervalued. If you're wondering about the valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

You can invest in any company you want. But if you prefer to focus on stocks that have demonstrated insider buying, here is a list of companies 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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