Investors are often guided by the idea of discovering 'the next big thing', even if that means buying 'story stocks' without any revenue, let alone profit. Unfortunately, these high risk investments often have little probability of ever paying off, and many investors pay a price to learn their lesson. Loss making companies can act like a sponge for capital - so investors should be cautious that they're not throwing good money after bad.

So if this idea of high risk and high reward doesn't suit, you might be more interested in profitable, growing companies, like Fitzroy River (ASX:FZR). 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.

Check out our latest analysis for Fitzroy River

Fitzroy River's Improving Profits

Investors and investment funds chase profits, and that means share prices tend rise with positive earnings per share (EPS) outcomes. So a growing EPS generally brings attention to a company in the eyes of prospective investors. Commendations have to be given in seeing that Fitzroy River grew its EPS from AU$0.0009 to AU$0.0079, in one short year. Even though that growth rate may not be repeated, that looks like a breakout improvement. This could point to the business hitting a point of inflection.

One way to double-check a company's growth is to look at how its revenue, and earnings before interest and tax (EBIT) margins are changing. The good news is that Fitzroy River is growing revenues, and EBIT margins improved by 53.6 percentage points to 47%, over the last year. Ticking those two boxes is a good sign of growth, in our book.

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

Since Fitzroy River is no giant, with a market capitalisation of AU$18m, you should definitely check its cash and debt before getting too excited about its prospects.

Are Fitzroy River Insiders Aligned With All Shareholders?

It's said that there's no smoke without fire. For investors, insider buying is often the smoke that indicates which stocks could set the market alight. Because often, the purchase of stock is a sign that the buyer views it as undervalued. However, insiders are sometimes wrong, and we don't know the exact thinking behind their acquisitions.

Even though some insiders sold down their holdings, their actions speak louder than words with AU$538k more invested than sold by people who know they company best. An optimistic sign for those with Fitzroy River in their watchlist. It is also worth noting that it was Independent Non-Executive Director Susan Thomas who made the biggest single purchase, worth AU$437k, paying AU$0.13 per share.

On top of the insider buying, we can also see that Fitzroy River insiders own a large chunk of the company. Actually, with 43% of the company to their names, insiders are profoundly invested in the business. Shareholders and speculators should be reassured by this kind of alignment, as it suggests the business will be run for the benefit of shareholders. Valued at only AU$18m Fitzroy River is really small for a listed company. So this large proportion of shares owned by insiders only amounts to AU$7.9m. That might not be a huge sum but it should be enough to keep insiders motivated!

Should You Add Fitzroy River To Your Watchlist?

Fitzroy River's earnings per share growth have been climbing higher at an appreciable rate. Just as heartening; insiders both own and are buying more stock. These factors seem to indicate the company's potential and that it has reached an inflection point. We'd suggest Fitzroy River belongs near the top of your watchlist. However, before you get too excited we've discovered 3 warning signs for Fitzroy River (2 can't be ignored!) that you should be aware of.

There are plenty of other companies that have insiders buying up shares. So if you like the sound of Fitzroy River, you'll probably love this free list of growing companies that insiders are buying.

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.

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