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 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.
So if this idea of high risk and high reward doesn't suit, you might be more interested in profitable, growing companies, like Broadcom (NASDAQ:AVGO). 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.
How Fast Is Broadcom 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. Recognition must be given to the that Broadcom has grown EPS by 48% per year, over the last three years. While that sort of growth rate isn't sustainable for long, it certainly catches the eye of prospective investors.
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. Broadcom shareholders can take confidence from the fact that EBIT margins are up from 29% to 41%, and revenue is growing. That's great to see, on both counts.
In the chart below, you can see how the company has grown earnings and revenue, over time. To see the actual numbers, click on the chart.
While we live in the present moment, there's little doubt that the future matters most in the investment decision process. So why not check this interactive chart depicting future EPS estimates, for Broadcom?
Are Broadcom Insiders Aligned With All Shareholders?
Since Broadcom has a market capitalisation of US$216b, we wouldn't expect insiders to hold a large percentage of shares. But thanks to their investment in the company, it's pleasing to see that there are still incentives to align their actions with the shareholders. We note that their impressive stake in the company is worth US$3.3b. Holders should find this level of insider commitment quite encouraging, since it would ensure that the leaders of the company would also experience their success, or failure, with the stock.
Should You Add Broadcom To Your Watchlist?
Broadcom's earnings have taken off in quite an impressive fashion. That EPS growth certainly is attention grabbing, and the large insider ownership only serves to further stoke our interest. At times fast EPS growth is a sign the business has reached an inflection point, so there's a potential opportunity to be had here. So at the surface level, Broadcom is worth putting on your watchlist; after all, shareholders do well when the market underestimates fast growing companies. Even so, be aware that Broadcom is showing 1 warning sign in our investment analysis , you should know about...
Although Broadcom certainly looks good, it may appeal to more investors if insiders were buying up shares. If you like to see insider buying, then this free list of growing companies that insiders are buying, could be exactly what you're looking for.
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.
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