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.' Loss making companies can act like a sponge for capital - so investors should be cautious that they're not throwing good money after bad.

Despite being in the age of tech-stock blue-sky investing, many investors still adopt a more traditional strategy; buying shares in profitable companies like Synopsys (NASDAQ:SNPS). 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.

See our latest analysis for Synopsys

Synopsys' Earnings Per Share Are 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. Therefore, there are plenty of investors who like to buy shares in companies that are growing EPS. Shareholders will be happy to know that Synopsys' EPS has grown 23% each year, compound, over three years. So it's not surprising to see the company trades on a very high multiple of (past) earnings.

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. On the revenue front, Synopsys has done well over the past year, growing revenue by 15% to US$6.1b but EBIT margin figures were less stellar, seeing a decline over the last 12 months. So it seems the future may hold further growth, especially if EBIT margins can remain steady.

In the chart below, you can see how the company has grown earnings and revenue, over time. Click on the chart to see the exact numbers.

In investing, as in life, the future matters more than the past. So why not check out this free interactive visualization of Synopsys' forecast profits?

Are Synopsys Insiders Aligned With All Shareholders?

Owing to the size of Synopsys, we wouldn't expect insiders to hold a significant proportion of the company. But we are reassured by the fact they have invested in the company. We note that their impressive stake in the company is worth US$487m. This comes in at 0.6% of shares in the company, which is a fair amount of a business of this size. This still shows shareholders there is a degree of alignment between management and themselves.

It's good to see that insiders are invested in the company, but are remuneration levels reasonable? A brief analysis of the CEO compensation suggests they are. Our analysis has discovered that the median total compensation for the CEOs of companies like Synopsys, with market caps over US$8.0b, is about US$13m.

The Synopsys CEO received US$10m in compensation for the year ending October 2023. That is actually below the median for CEO's of similarly sized companies. 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.

Should You Add Synopsys To Your Watchlist?

If you believe that share price follows earnings per share you should definitely be delving further into Synopsys' strong EPS growth. If you still have your doubts, remember too that company insiders have a considerable investment aligning themselves with the shareholders and CEO pay is quite modest compared to similarly sized companiess. Everyone has their own preferences when it comes to investing but it definitely makes Synopsys look rather interesting indeed. Before you take the next step you should know about the 1 warning sign for Synopsys that we have uncovered.

Although Synopsys certainly looks good, it may appeal to more investors if insiders were buying up shares. If you like to see companies with more skin in the game, then check out this handpicked selection of companies that not only boast of strong growth but have strong insider backing.

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.