Here's Why We Think African Rainbow Capital Investments (JSE:AIL) Might Deserve Your Attention Today
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 currently lacks a track record of revenue and profit. But as Peter Lynch said in One Up On Wall Street, ‘Long shots almost never pay off.’ A loss-making company is yet to prove itself with profit, and eventually the inflow of external capital may dry up.
In contrast to all that, many investors prefer to focus on companies like African Rainbow Capital Investments (JSE:AIL), which has not only revenues, but also profits. While profit isn’t the sole metric that should be considered when investing, it’s worth recognising businesses that can consistently produce it.
Check out our latest analysis for African Rainbow Capital Investments
How Fast Is African Rainbow Capital Investments Growing?
The market is a voting machine in the short term, but a weighing machine in the long term, so you’d expect share price to follow earnings per share (EPS) outcomes eventually. That makes EPS growth an attractive quality for any company. African Rainbow Capital Investments’ shareholders have have plenty to be happy about as their annual EPS growth for the last 3 years was 42%. While that sort of growth rate isn’t sustainable for long, it certainly catches the eye of prospective investors.
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. It’s noted that African Rainbow Capital Investments’ revenue from operations was lower than its revenue in the last twelve months, so that could distort our analysis of its margins. While we note African Rainbow Capital Investments achieved similar EBIT margins to last year, revenue grew by a solid 16% to R2.5b. That’s a real positive.
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.
While profitability drives the upside, prudent investors always check the balance sheet, too.
Are African Rainbow Capital Investments Insiders Aligned With All Shareholders?
It’s pleasing to see company leaders with putting their money on the line, so to speak, because it increases alignment of incentives between the people running the business, and its true owners. Shareholders will be pleased by the fact that insiders own African Rainbow Capital Investments shares worth a considerable sum. To be specific, they have R601m worth of shares. That shows significant buy-in, and may indicate conviction in the business strategy. That amounts to 7.6% of the company, demonstrating a degree of high-level alignment with shareholders.
Is African Rainbow Capital Investments Worth Keeping An Eye On?
African Rainbow Capital Investments’ earnings per share growth have been climbing higher at an appreciable rate. This level of EPS growth does wonders for attracting investment, and the large insider investment in the company is just the cherry on top. At times fast EPS growth is a sign the business has reached an inflection point, so there’s a potential opportunity to be had here. So based on this quick analysis, we do think it’s worth considering African Rainbow Capital Investments for a spot on your watchlist. One of Buffett’s considerations when discussing businesses is if they are capital light or capital intensive. Generally, a company with a high return on equity is capital light, and can thus fund growth more easily. So you might want to check this graph comparing African Rainbow Capital Investments’ ROE with industry peers (and the market at large).
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 ZA with promising growth potential and insider confidence.
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.