Some have more money than common sense, they say, so even companies with no income, no profit, and a history of default can easily find investors. But as Peter Lynch put it in One Up on Wall Street, ‘Long shots hardly ever pay off.’

In the age of investing in the blue sky of tech stocks, my choice may seem old-fashioned; I always prefer profitable businesses like GNP gilts (NSE: PNBGILTS). Even if stocks are fully valued today, most capitalists would recognize its benefits as a demonstration of constant value generation. In comparison, loss-making companies act like a sponge for capital – but unlike such a sponge, they don’t always produce something when in a hurry.

See our latest analysis for PNB gilts

Improved profits of PNB Gilts

Over the past three years, earnings per share of PNB Gilts have taken off like a rocket; fast, and from a low base. So the actual growth rate doesn’t tell us much. So it makes sense to focus on more recent growth rates instead. Like a firecracker in the night sky, PNB Gilts’ EPS has dropped from 10.35 to 25.23, over the past year. 144% annual growth is certainly a sight to behold. This could be a sign that the business has reached a real inflection point.

A close look at revenue growth and profit before interest and tax (EBIT) margins can help shed light on the sustainability of recent earnings growth. I note that the income of PNB Gilts operations was lower than its turnover for the last twelve months, which could skew my analysis of its margins. While we note that PNB Gilts’ EBIT margins have remained stable over the past year, revenue increased 81% to € 6.6 billion. It’s really positive.

You can check out the revenue and profit growth trend of the company in the chart below. Click on the graph to see the exact numbers.

PNB Gilts is not a large company, considering its market capitalization of 13 billion yen. It is therefore very important to check the strength of its balance sheet.

Are PNB Gilts Insiders Aligned With All Shareholders?

I always like to check CEO compensation because I think reasonable compensation levels, around or below the median, can be a sign that shareholders’ interests are being taken into account. I found out that the median total compensation of CEOs of companies like PNB Gilts with market caps between 7.4 billion yen and 30 billion yen is around 17 million yen.

PNB Gilts CEO received € 10 million in compensation for the fiscal year ended. This is lower than the average for similar sized companies and seems pretty reasonable to me. While the level of CEO compensation is not a big factor in my view of the company, modest compensation is positive because it suggests that the board has the interests of shareholders in mind. It can also be a sign of a culture of integrity, in the broad sense.

Is PNB Gilts Worth Watching?

PNB Gilts’ profits took off like any random cryptocurrency, in 2017. With profits skyrocketing, it seems likely the company has a bright future; and it may have reached an inflection point. At the same time, the reasonable compensation of the CEO is reflected well on the board of directors. While I can’t be sure without a deeper dive, it looks like PNB Gilts has the hallmarks of a quality company; and it would be worth watching. It is also necessary to consider the ever-present specter of investment risk. We have identified 3 warning signs with PNB Gilts and understanding them should be part of your investment process.

While PNB Gilts certainly looks good to me, I would like more insiders to buy stocks. If you also like to see insiders buy, then this free list of growing companies that insiders are buying, might be exactly what you are looking for.

Please note that the insider dealing discussed in this article refers to reportable trades in the relevant jurisdiction.

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This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.
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