Here's Why We Think FOS Capital (ASX:FOS) Is Well Worth Watching

It's common for many investors, especially those who are inexperienced, to buy shares in companies with a good story even if these companies are loss-making. But the reality is that when a company loses money each year, for long enough, its investors will usually take their share of those losses. A loss-making company is yet to prove itself with profit, and eventually the inflow of external capital may dry up.

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

How Quickly Is FOS Capital Increasing Earnings Per Share?

Generally, companies experiencing growth in earnings per share (EPS) should see similar trends in share price. Therefore, there are plenty of investors who like to buy shares in companies that are growing EPS. FOS Capital managed to grow EPS by 12% per year, over three years. That's a pretty good rate, if the company can sustain it.

Top-line growth is a great indicator that growth is sustainable, and combined with a high earnings before interest and taxation (EBIT) margin, it's a great way for a company to maintain a competitive advantage in the market. The good news is that FOS Capital is growing revenues, and EBIT margins improved by 2.8 percentage points to 3.3%, over the last year. Both of which are great metrics to check off for potential growth.

The chart below shows how the company's bottom and top lines have progressed over time. To see the actual numbers, click on the chart.

Since FOS Capital is no giant, with a market capitalisation of AU$10m, you should definitely check its cash and debt before getting too excited about its prospects.

Are FOS Capital 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. That's because insider buying often indicates that those closest to the company have confidence that the share price will perform well. Of course, we can never be sure what insiders are thinking, we can only judge their actions.

One positive for FOS Capital, is that company insiders spent AU$45k acquiring shares in the last year. While this investment may be modest, it is great considering the lack of insider selling. Zooming in, we can see that the biggest insider purchase was by CEO, MD & Director Constantine Scrinis for AU$20k worth of shares, at about AU$0.17 per share.

It's reassuring that FOS Capital insiders are buying the stock, but that's not the only reason to think management are fair to shareholders. Namely, FOS Capital has a very reasonable level of CEO pay. Our analysis has discovered that the median total compensation for the CEOs of companies like FOS Capital with market caps under AU$299m is about AU$441k.

FOS Capital offered total compensation worth AU$240k to its CEO in the year to June 2023. That comes in below the average for similar sized companies and seems pretty reasonable. CEO remuneration levels are not the most important metric for investors, but when the pay is modest, that does support enhanced alignment between the CEO and the ordinary shareholders. It can also be a sign of a culture of integrity, in a broader sense.

Does FOS Capital Deserve A Spot On Your Watchlist?

One important encouraging feature of FOS Capital is that it is growing profits. And that's not all. We've also seen insiders buying stock, and noted modest executive pay. The sum of all that, points to a quality business, and a genuine prospect for further research. However, before you get too excited we've discovered 2 warning signs for FOS Capital that you should be aware of.

The good news is that FOS Capital is not the only growth stock with insider buying. Here's a list of them... with insider buying in the last three months!

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.