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. While a well funded company may sustain losses for years, it will need to generate a profit eventually, or else investors will move on and the company will wither away.
So if this idea of high risk and high reward doesn’t suit, you might be more interested in profitable, growing companies, like Eaton (NYSE:ETN). While this doesn’t necessarily speak to whether it’s undervalued, the profitability of the business is enough to warrant some appreciation – especially if its growing.
View our latest analysis for Eaton
How Fast Is Eaton Growing?
If a company can keep growing earnings per share (EPS) long enough, its share price should eventually follow. That makes EPS growth an attractive quality for any company. Shareholders will be happy to know that Eaton’s EPS has grown 25% each year, compound, over three years. If the company can sustain that sort of growth, we’d expect shareholders to come away satisfied.
It’s often helpful to take a look at earnings before interest and tax (EBIT) margins, as well as revenue growth, to get another take on the quality of the company’s growth. Eaton shareholders can take confidence from the fact that EBIT margins are up from 16% to 18%, and revenue is growing. Ticking those two boxes is a good sign of growth, in our book.
You can take a look at the company’s revenue and earnings growth trend, in the chart below. Click on the chart to see the exact numbers.
Of course the knack is to find stocks that have their best days in the future, not in the past. You could base your opinion on past performance, of course, but you may also want to check this interactive graph of professional analyst EPS forecasts for Eaton.
Are Eaton Insiders Aligned With All Shareholders?
Owing to the size of Eaton, we wouldn’t expect insiders to hold a significant proportion of the company. But we are reassured by the fact they have invested in the company. Notably, they have an enviable stake in the company, worth US$323m. While that is a lot of skin in the game, we note this holding only totals to 0.2% of the business, which is a result of the company being so large. This still shows shareholders there is a degree of alignment between management and themselves.
Should You Add Eaton To Your Watchlist?
You can’t deny that Eaton has grown its earnings per share at a very impressive rate. That’s attractive. Further, the high level of insider ownership is impressive and suggests that the management appreciates the EPS growth and has faith in Eaton’s continuing strength. Fast growth and confident insiders should be enough to warrant further research, so it would seem that it’s a good stock to follow. Now, you could try to make up your mind on Eaton by focusing on just these factors, or you could also consider how its price-to-earnings ratio compares to other companies in its industry.
While opting for stocks without growing earnings and absent insider buying can yield results, for investors valuing these key metrics, here is a carefully selected list of companies in the US with promising growth potential and insider confidence.
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.