Some have more money than common sense, they say, so even businesses with no income, no profit, and a record of failure can easily find investors. But as Warren Buffett said, “If you’ve been playing poker for half an hour and you still don’t know what’s the noise, you’re the noise.” When buying such historical stocks, investors are all too often the fools.
Contrary to all this, I prefer to spend time on companies like The 5 big sporting goods (NASDAQ: BGFV), which not only has income, but also profits. Even if stocks are fully valued today, most capitalists would recognize its benefits as a demonstration of constant value generation. Loss-making businesses always race against time to achieve financial viability, but time is often the friend of the profitable business, especially if it is growing.
How fast is Big 5 Sporting Goods increasing its earnings per share?
In business, but not in life, profit is a key measure of success; and stock prices tend to reflect earnings per share (EPS). So, like a ray of sunlight through a hole in the clouds, improving EPS is considered a good sign. You can imagine, then, that it almost knocked me out when I realized that Big 5 Sporting Goods had increased their EPS from US $ 0.70 to US $ 4.90, in a short year. When profits grow so quickly, it often means good things ahead for the business. But the key is to discern if something deep has changed, or if it’s just a one-time boost.
One way to check how a business is growing is to look at how its income and profit before interest and tax (EBIT) have changed. Big 5 Sporting Goods shareholders can be confident that EBIT margins are up 1.6% to 12% and revenues are increasing. Checking those two boxes is a good sign of growth in my book.
In the graph below, you can see how the company has increased its profit and revenue over time. Click on the graph to see the exact numbers.
NasdaqGS: Revenue and Revenue History of BGFV as of September 26, 2021
While it is always good to see increased profits, you should always remember that a low balance sheet could come back to bite. So check out Big 5 Sporting Goods balance sheet strength, before getting too excited.
Are the Big 5 Sporting Goods Insiders Aligned with All Shareholders?
I feel more secure owning shares in a company if insiders also own shares, thereby aligning our interests more closely. So it’s good to see that the Big 5 Sporting Goods insiders have significant capital invested in the stock. Indeed, they hold 34 million US dollars of its shares. That’s a lot of money, and that’s no small incentive to work hard. These holdings represent more than 5.9% of the company; skin visible in the game.
It means a lot to see insiders investing in the company, but I wonder if the compensation policies are shareholder friendly. Well, based on CEO pay, I would say they are indeed. I found that the median total compensation of CEOs of companies like Big 5 Sporting Goods with market caps between $ 200 million and $ 800 million is around $ 1.7 million.
Big 5 Sporting Goods offered total compensation worth US $ 1.4 million to its CEO in the year to. This is lower than the average for similar sized companies and seems pretty reasonable to me. CEO compensation levels aren’t the most important metric for investors, but when the salary is modest, it promotes better alignment between the CEO and common shareholders. It can also be a sign of good governance, more generally.
Are the Top 5 Sporting Goods Worth a Place on Your Watchlist?
Big 5 Sporting Goods earnings per share took off like a rocket pointed straight at the moon. The icing on the cake is that the insiders own a bunch of stocks, and the CEO’s pay really looks quite reasonable. The strong increase in profits could be a sign of good business momentum. Big 5 Sporting Goods certainly ticks a few of my boxes, so I think it probably deserves a closer look. It should be noted however that we have found 2 warning signs for Big 5 Sporting Goods that you need to take into consideration.
You can invest in any business. But if you’d rather focus on stocks that have demonstrated insider buying, here’s a list of companies that have made insider buys in the past three months.
Please note that the insider trading discussed in this article refers to reportable trades in the relevant jurisdiction.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. 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 material. Simply Wall St has no position in the mentioned stocks.
Do you have any feedback on this item? Are you worried about the content? Get in touch with us directly. You can also send an email to the editorial team (at) simplywallst.com.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.