Some have more money than sense, they say, so even companies with no revenue, no profit, and a record number of underflows can easily find investors. But as Warren Buffett mused, “If you’ve been playing poker for half an hour and still don’t know who the moron is, you are the moron.” Too often, when buying such story stocks, investors are the weakest.
In contrast, I prefer to spend my time with companies like Big 5 sporting goods (NASDAQ: BGFV), which not only generates income, but also profits. Even if stocks were fully valued today, most capitalists would recognize their gains as evidence of steady value creation. Loss-making companies always struggle against time to achieve financial sustainability, but time is often a friend of the profitable company, especially as it grows.
How fast is Big 5 Sporting Goods earnings per share growing?
In business, but not in life, profits are an important measure of success; and share prices typically reflect earnings per share (EPS). Like a ray of sunshine through a gap in the cloud, the improvement in EPS is a good sign. So, as you can imagine, I almost knocked my socks off when I realized that Big 5 Sporting Goods had increased its earnings per share from $ 0.70 to $ 4.90 in a short year . When you see profits grow this quickly, it often means good things for the company. But the key is to see if something has changed profoundly or if this is just a one-off boost.
One way to examine the growth of a company is to look at how sales and earnings before interest and taxes (EBIT) are changing. The shareholders of Big 5 Sporting Goods can rest assured that the EBIT margin has increased from 1.6% to 12% and that sales are growing. Checking these two boxes is a good sign of growth in my book.
In the graph below, you can see how the company has grown revenue and revenue over time. Click on the diagram to see the exact numbers.
NasdaqGS: BGFV earnings and sales history September 26, 2021
While it is always good to see profits soar, it should always be remembered that a weak balance sheet can attack again. So check the Big 5 Sporting Goods balance sheet strength before you get too excited.
Are the Big 5 sporting goods insiders connected to all shareholders?
It makes me safer to own shares in a company when insiders also own shares and thus our interests are better aligned. Hence, it’s good to see that Big 5 Sporting Goods insiders have invested a significant amount of the capital in the stock. In fact, they hold $ 34 million worth of shares. That’s a lot of money and no small incentive to work hard. These holdings make up over 5.9% of the company; visible skin in the game.
It means a lot to see insiders invest in the business, but I wonder if the compensation policy is shareholder friendly. Well, based on the CEO salary, I’d say they actually are. I’ve found that the average total compensation paid to CEOs at companies like Big 5 Sporting Goods with market caps between $ 200 million and $ 800 million is roughly $ 1.7 million.
Big 5 Sporting Goods offered its CEO total compensation of $ 1.4 million in year to. This is below average for companies of similar size and seems pretty reasonable to me. The amount of CEO compensation isn’t the most important metric for investors, but when the pay is modest it helps better alignment between the CEO and the common stockholders. It can also be a general sign of good governance.
Do the Big 5 sporting goods deserve a place on your watchlist?
Big 5 Sporting Goods earnings per share shot straight to the moon like a rocket. The icing on the cake is that insiders own tons of stocks and the CEO salaries really seem pretty reasonable. The strong increase in earnings could signal good business momentum. Big 5 Sporting Goods certainly meets some of my criteria so I think it’s probably worth further consideration. However, it is worth noting that we found 2 warning signs for Big 5 Sporting Goods that you need to consider.
You can invest in any company you want. However, if you’d rather focus on stocks that have shown insider buying, here is a list of companies with insider buying over the past three months.
Please note that the insider transactions discussed in this article refer to reportable transactions in the relevant jurisdiction.
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