The excitement of investing in a company that can reverse its fortunes is a big draw for some speculators, so even companies that have no revenue, no profit, and a record of falling short, can manage to find investors. 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 Smartgroup (ASX:SIQ). Now this is not to say that the company presents the best investment opportunity around, but profitability is a key component to success in business.

Check out our latest analysis for Smartgroup

Smartgroup's Earnings Per Share Are Growing

Generally, companies experiencing growth in earnings per share (EPS) should see similar trends in share price. That makes EPS growth an attractive quality for any company. Over the last three years, Smartgroup has grown EPS by 10.0% per year. That's a pretty good rate, if the company can sustain it.

It's often helpful to take a look at earnings before interest and tax (EBIT) margins, as well as revenue growth, to get another take on the quality of the company's growth. Smartgroup maintained stable EBIT margins over the last year, all while growing revenue 24% to AU$283m. That's encouraging news for the company!

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.

The trick, as an investor, is to find companies that are going to perform well in the future, not just in the past. While crystal balls don't exist, you can check our visualization of consensus analyst forecasts for Smartgroup's future EPS 100% free.

Are Smartgroup 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. This view is based on the possibility that stock purchases signal bullishness on behalf of the buyer. Of course, we can never be sure what insiders are thinking, we can only judge their actions.

Even though some insiders sold down their holdings, their actions speak louder than words with AU$849k more invested than sold by people who know they company best. This overall confidence in the company at current the valuation signals their optimism. Zooming in, we can see that the biggest insider purchase was by Independent Non-Executive Chairman John Prendiville for AU$584k worth of shares, at about AU$8.34 per share.

The good news, alongside the insider buying, for Smartgroup bulls is that insiders (collectively) have a meaningful investment in the stock. As a matter of fact, their holding is valued at AU$35m. That's a lot of money, and no small incentive to work hard. Even though that's only about 3.5% of the company, it's enough money to indicate alignment between the leaders of the business and ordinary shareholders.

While insiders already own a significant amount of shares, and they have been buying more, the good news for ordinary shareholders does not stop there. The cherry on top is that the CEO, Scott Wharton is paid comparatively modestly to CEOs at similar sized companies. The median total compensation for CEOs of companies similar in size to Smartgroup, with market caps between AU$636m and AU$2.5b, is around AU$1.7m.

The Smartgroup CEO received AU$1.2m in compensation for the year ending December 2023. That is actually below the median for CEO's of similarly sized companies. While the level of CEO compensation shouldn't be the biggest factor in how the company is viewed, modest remuneration is a positive, because it suggests that the board keeps shareholder interests in mind. It can also be a sign of a culture of integrity, in a broader sense.

Should You Add Smartgroup To Your Watchlist?

One important encouraging feature of Smartgroup is that it is growing profits. On top of that, we've seen insiders buying shares even though they already own plenty. That makes the company a prime candidate for your watchlist - and arguably a research priority. We don't want to rain on the parade too much, but we did also find 1 warning sign for Smartgroup that you need to be mindful of.

Keen growth investors love to see insider activity. Thankfully, Smartgroup isn't the only one. You can see a a curated list of Australian companies which have exhibited consistent growth accompanied by high insider ownership.

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.