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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 Divergent Energy Services (CVE:DVG). While profit is not necessarily a social good, it's easy to admire a business that can consistently produce it. Conversely, a loss-making company is yet to prove itself with profit, and eventually the sweet milk of external capital may run sour.
How Fast Is Divergent Energy Services Growing Its Earnings Per Share?
In a capitalist society capital chases profits, and that means share prices tend rise with earnings per share (EPS). So like a ray of sunshine through a gap in the clouds, improving EPS is considered a good sign. It is therefore awe-striking that Divergent Energy Services's EPS went from US$0.0088 to US$0.075 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. While we note Divergent Energy Services's EBIT margins were flat over the last year, revenue grew by a solid 93% to US$8.4m. 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.
Divergent Energy Services isn't a huge company, given its market capitalization of CA$4.0m. That makes it extra important to check on its balance sheet strength.
Are Divergent Energy Services Insiders Aligned With All Shareholders?
Like that fresh smell in the air when the rains are coming, insider buying fills me with optimistic anticipation. That's because insider buying often indicates that those closest to the company have confidence that the share price will perform well. However, insiders are sometimes wrong, and we don't know the exact thinking behind their acquisitions.
In the last twelve months Divergent Energy Services insiders spent US$49k on stock; good news for shareholders. This might not be a huge sum, but it's well worth noting anyway, given the complete lack of selling. We also note that it was the Executive Chairman, Cameron Barton, who made the biggest single acquisition, paying CA$29k for shares at about CA$0.075 each.
And the insider buying isn't the only sign of alignment between shareholders and the board, since Divergent Energy Services insiders own more than a third of the company. Actually, with 35% of the company to their names, insiders are profoundly invested in the business. I'm reassured by this kind of alignment, as it suggests the business will be run for the benefit of shareholders. Valued at only CA$4.0m Divergent Energy Services is really small for a listed company. That means insiders only have US$1.4m worth of shares, despite the large proportional holding. That's not a huge stake in absolute terms, but it should help keep insiders aligned with other shareholders.
Is Divergent Energy Services Worth Keeping An Eye On?
Divergent Energy Services's earnings per share have taken off like a rocket aimed right at the moon. Just as heartening; insiders both own and are buying more stock. This quick rundown suggests that the business may be of good quality, and also at an inflection point, so maybe Divergent Energy Services deserves timely attention. Don't forget that there may still be risks. For instance, we've identified 5 warning signs for Divergent Energy Services (4 are a bit concerning) you should be aware of.
There are plenty of other companies that have insiders buying up shares. So if you like the sound of Divergent Energy Services, you'll probably love this free list of growing companies that insiders are buying.
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.