Like a puppy chasing its tail, some new investors often pursue “the next big thing,†even if that means buying “history stocks†with no income, let alone profit. But as Peter Lynch put it in One Up on Wall Street, ‘Long shots hardly ever pay off.’
So if you’re like me, you might be more interested in profitable and growing businesses like Xero (ASX: XRO). While profit isn’t necessarily social good, it’s easy to admire a business that can consistently produce it. Conversely, a loss-making company has yet to prove itself with profit, and eventually the sweet milk of external capital can turn sour.
See our latest review for Xero
Improving Xero Profits
In business, but not in life, profit is a key measure of success; and stock prices tend to reflect earnings per share (EPS). So, like a ray of sunlight through a hole in the clouds, improving EPS is considered a good sign. You can imagine, then, that it almost knocked me out when I realized that Xero had increased its EPS from NZ $ 0.023 to NZ $ 0.13, in a short year. While this rate of growth is unlikely to repeat itself, it does look like a breakout improvement. But the key is to discern if something deep has changed, or if it’s just a one-time boost.
I like to see revenue growth as an indication that growth is sustainable, and I look for a high profit margin before interest and taxes (EBIT) to indicate a competitive gap (although some low-margin companies also have ditches). Not all of Xero’s income last year was operating incomeSo keep in mind that the revenue and margin numbers I used might not be the best representation of the underlying business. Xero shareholders can rely on the fact that EBIT margins are up 4.7% to 7.3% and revenues are increasing. It’s great to see, on both counts.
The graph below shows how the company’s bottom line has progressed over time. Click on the graph to see the exact numbers.
You don’t drive with your eyes on the rearview mirror, so this may be of more interest to you free report showing analyst forecasts for Xero future profits.
Are Xero Insiders Aligned With All Shareholders?
We wouldn’t expect to see insiders owning a significant percentage of an A $ 21 billion company like Xero. But we are reassured by the fact that they are investors in the company. Indeed, they have invested a sparkling mountain of wealth, currently valued at NZ $ 2.5 billion. This suggests to me that management will be very attentive to the interests of shareholders when making a decision!
It’s good to see insiders invested in the company, but are the pay levels reasonable? Well, based on CEO pay, I would say they are indeed. For companies with market capitalizations over NZ $ 12 billion, like Xero, the median CEO salary is around NZ $ 5.2 million.
The CEO of Xero received just NZ $ 2.5 million in total compensation for the year ending. It sounds like modest compensation to me, and may suggest a certain respect for the interests of shareholders. CEO compensation levels aren’t the most important metric for investors, but when the salary is modest, it promotes better alignment between the CEO and common shareholders. It can also be a sign of a culture of integrity, in the broad sense.
Does Xero Deserve A Place On Your Watchlist?
Xero’s earnings per share growth levitated, like a mountain goat scaling the Alps. The sweetener is that insiders have a mountain of stocks, and the CEO’s pay is quite reasonable. The strong increase in profits could be a sign of good business momentum. Xero certainly ticks a few of my boxes, so I think it probably deserves a closer look. We should say that we found out 4 warning signs for Xero (1 shouldn’t be ignored!) Which you should be aware of before investing here.
While Xero certainly looks good to me, I would like more insiders to buy stocks. If you also like to see insider buying then this free list of growing companies that insiders are buying, might be exactly what you are looking for.
Please note that the insider trading discussed in this article refers to reportable trades in the relevant jurisdiction.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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