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Should You Be Adding Lynas Rare Earths (ASX:LYC) To Your Watchlist Today?

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Some have more dollars than sense, they say, so even companies that have no revenue, no profit, and a record of falling short, can easily find investors. 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.

So if you're like me, you might be more interested in profitable, growing companies, like Lynas Rare Earths (ASX:LYC). While that doesn't make the shares worth buying at any price, you can't deny that successful capitalism requires profit, eventually. 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 Lynas Rare Earths

How Fast Is Lynas Rare Earths Growing Its Earnings Per Share?

In business, though not in life, profits are a key measure of success; and share prices tend to reflect earnings per share (EPS). So like the hint of a smile on a face that I love, growing EPS generally makes me look twice. It is therefore awe-striking that Lynas Rare Earths's EPS went from AU$0.023 to AU$0.30 in just one year. When you see earnings grow that quickly, it often means good things ahead for the company. But the key is discerning whether something profound has changed, or if this is a just a one-off boost.

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. Lynas Rare Earths shareholders can take confidence from the fact that EBIT margins are up from 4.5% to 46%, and revenue is growing. Ticking those two boxes is a good sign of growth, in my book.

In the chart below, you can see how the company has grown earnings, and revenue, over time. For finer detail, click on the image.

earnings-and-revenue-history
earnings-and-revenue-history

Fortunately, we've got access to analyst forecasts of Lynas Rare Earths's future profits. You can do your own forecasts without looking, or you can take a peek at what the professionals are predicting.

Are Lynas Rare Earths Insiders Aligned With All Shareholders?

We would not expect to see insiders owning a large percentage of a AU$7.8b company like Lynas Rare Earths. But we do take comfort from the fact that they are investors in the company. To be specific, they have AU$57m worth of shares. That's a lot of money, and no small incentive to work hard. Even though that's only about 0.7% of the company, it's enough money to indicate alignment between the leaders of the business and ordinary shareholders.

It's good to see that insiders are invested in the company, but are remuneration levels reasonable? Well, based on the CEO pay, I'd say they are indeed. For companies with market capitalizations between AU$5.8b and AU$17b, like Lynas Rare Earths, the median CEO pay is around AU$3.5m.

Lynas Rare Earths offered total compensation worth AU$2.3m to its CEO in the year to . 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. I'd also argue reasonable pay levels attest to good decision making more generally.

Is Lynas Rare Earths Worth Keeping An Eye On?

Lynas Rare Earths's earnings have taken off like any random crypto-currency did, back in 2017. The sweetener is that insiders have a mountain of stock, and the CEO remuneration is quite reasonable. The strong EPS improvement suggests the businesses is humming along. Lynas Rare Earths certainly ticks a few of my boxes, so I think it's probably well worth further consideration. What about risks? Every company has them, and we've spotted 2 warning signs for Lynas Rare Earths you should know about.

Although Lynas Rare Earths certainly looks good to me, I would like it more if insiders were buying up shares. If you like to see insider buying, too, then this free list of growing companies that insiders are buying, could be exactly what you're looking for.

Please note the insider transactions discussed in this article refer to reportable transactions in the relevant jurisdiction.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

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