It's common for many investors, especially those who are inexperienced, to buy shares in companies with a good story even if these companies are loss-making. 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. Loss making companies can act like a sponge for capital - so investors should be cautious that they're not throwing good money after bad.
So if this idea of high risk and high reward doesn't suit, you might be more interested in profitable, growing companies, like Socket Mobile (NASDAQ:SCKT). Even if this company is fairly valued by the market, investors would agree that generating consistent profits will continue to provide Socket Mobile with the means to add long-term value to shareholders.
How Fast Is Socket Mobile Growing Its Earnings Per Share?
Investors and investment funds chase profits, and that means share prices tend rise with positive earnings per share (EPS) outcomes. Which is why EPS growth is looked upon so favourably. It's an outstanding feat for Socket Mobile to have grown EPS from US$0.049 to US$0.24 in just one year. Even though that growth rate may not be repeated, that looks like a breakout improvement. But the key is discerning whether something profound has changed, or if this is a just a one-off boost.
Careful consideration of revenue growth and earnings before interest and taxation (EBIT) margins can help inform a view on the sustainability of the recent profit growth. EBIT margins for Socket Mobile remained fairly unchanged over the last year, however the company should be pleased to report its revenue growth for the period of 27% to US$25m. That's progress.
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.
Since Socket Mobile is no giant, with a market capitalisation of US$20m, you should definitely check its cash and debt before getting too excited about its prospects.
Are Socket Mobile Insiders Aligned With All Shareholders?
Investors are always searching for a vote of confidence in the companies they hold and insider buying is one of the key indicators for optimism on the market. Because often, the purchase of stock is a sign that the buyer views it as undervalued. However, small purchases are not always indicative of conviction, and insiders don't always get it right.
It's nice to see that there have been no reports of any insiders selling shares in Socket Mobile in the previous 12 months. So it's definitely nice that Independent Chairman of the Board Charlie Bass bought US$35k worth of shares at an average price of around US$3.55. Purchases like this can help the investors understand the views of the management team; in which case they see some potential in Socket Mobile.
It's commendable to see that insiders have been buying shares in Socket Mobile, but there is more evidence of shareholder friendly management. To be specific, the CEO is paid modestly when compared to company peers of the same size. The median total compensation for CEOs of companies similar in size to Socket Mobile, with market caps under US$200m is around US$770k.
The Socket Mobile CEO received US$480k in compensation for the year ending December 2021. That comes in below the average for similar sized companies and seems pretty reasonable. 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 good governance, more generally.
Does Socket Mobile Deserve A Spot On Your Watchlist?
Socket Mobile's earnings per share have been soaring, with growth rates sky high. Better yet, we can observe insider buying and the chief executive pay looks reasonable. The strong EPS growth suggests Socket Mobile may be at an inflection point. If these have piqued your interest, then this stock surely warrants a spot on your watchlist. What about risks? Every company has them, and we've spotted 2 warning signs for Socket Mobile (of which 1 can't be ignored!) you should know about.
Keen growth investors love to see insider buying. Thankfully, Socket Mobile isn't the only one. You can see a 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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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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