It’s only natural that many investors, especially those who are new to the game, prefer to buy shares in ‘sexy’ stocks with a good story, even if those businesses lose money. And in their study titled Who Falls Prey to the Wolf of Wall Street?’ Leuz et. al. found that it is ‘quite common’ for investors to lose money by buying into ‘pump and dump’ schemes.

In the age of tech-stock blue-sky investing, my choice may seem old fashioned; I still prefer profitable companies like Vitec Software Group (STO:VIT B). 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.

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View our latest analysis for Vitec Software Group

How Quickly Is Vitec Software Group Increasing Earnings Per Share?

If a company can keep growing earnings per share (EPS) long enough, its share price will eventually follow. It’s no surprise, then, that I like to invest in companies with EPS growth. We can see that in the last three years Vitec Software Group grew its EPS by 9.5% per year. That’s a pretty good rate, if the company can sustain it.

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. Not all of Vitec Software Group’s revenue this year is revenue from operations, so keep in mind the revenue and margin numbers I’ve used might not be the best representation of the underlying business. Vitec Software Group maintained stable EBIT margins over the last year, all while growing revenue 22% to kr1.2b. That’s progress.

The chart below shows how the company’s bottom and top lines have progressed over time. For finer detail, click on the image.

OM:VIT B Income Statement, May 16th 2019
OM:VIT B Income Statement, May 16th 2019

While it’s always good to see growing profits, you should always remember that a weak balance sheet could come back to bite. So check Vitec Software Group’s balance sheet strength, before getting too excited.

Are Vitec Software Group Insiders Aligned With All Shareholders?

I like company leaders to have some skin in the game, so to speak, because it increases alignment of incentives between the people running the business, and its true owners. So it is good to see that Vitec Software Group insiders have a significant amount of capital invested in the stock. With a whopping kr744m worth of shares as a group, insiders have plenty riding on the company’s success. That holding amounts to 22% of the stock on issue, thus making insiders influential, and aligned, owners of the business.

It means a lot to see insiders invested in the business, but I find myself wondering if remuneration policies are shareholder friendly. Well, based on the CEO pay, I’d say they are indeed. For companies with market capitalizations between kr1.9b and kr7.7b, like Vitec Software Group, the median CEO pay is around kr4.9m.

Vitec Software Group offered total compensation worth kr3.1m to its CEO in the year to December 2017. That comes in below the average for similar sized companies, and seems pretty reasonable to me. 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. It can also be a sign of good governance, more generally.

Should You Add Vitec Software Group To Your Watchlist?

One important encouraging feature of Vitec Software Group is that it is growing profits. The fact that EPS is growing is a genuine positive for Vitec Software Group, but the pretty picture gets better than that. With a meaningful level of insider ownership, and reasonable CEO pay, a reasonable mind might conclude that this is one stock worth watching. While we’ve looked at the quality of the earnings, we haven’t yet done any work to value the stock. So if you like to buy cheap, you may want to check if Vitec Software Group is trading on a high P/E or a low P/E, relative to its industry.

Of course, you can do well (sometimes) buying stocks that are not growing earnings and do not have insiders buying shares. But as a growth investor I always like to check out companies that do have those features. You can access a free list of them here.

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

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.

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