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 completely lacks a track record of revenue and profit. And in their study titled Who Falls Prey to the Wolf of Wall Street?' Leuz et. al. found that it is 'quite common' for investors to lose money by buying into 'pump and dump' schemes.

In the age of tech-stock blue-sky investing, my choice may seem old fashioned; I still prefer profitable companies like Data#3 (ASX:DTL). While profit is not necessarily a social good, it's easy to admire a business that can consistently produce it. In comparison, loss making companies act like a sponge for capital - but unlike such a sponge they do not always produce something when squeezed.

See our latest analysis for Data#3

How Fast Is Data#3 Growing?

If a company can keep growing earnings per share (EPS) long enough, its share price will eventually follow. It's no surprise, then, that I like to invest in companies with EPS growth. As a tree reaches steadily for the sky, Data#3's EPS has grown 22% each year, compound, over three years. As a general rule, we'd say that if a company can keep up that sort of growth, shareholders will be smiling.

I like to see top-line growth as an indication that growth is sustainable, and I look for a high earnings before interest and taxation (EBIT) margin to point to a competitive moat (though some companies with low margins also have moats). Data#3 maintained stable EBIT margins over the last year, all while growing revenue 20% to AU$2.0b. That's progress.

The chart below shows how the company's bottom and top lines have progressed over time. To see the actual numbers, click on the chart. earnings-and-revenue-history

Fortunately, we've got access to analyst forecasts of Data#3's future profits. You can do your own forecasts without looking, or you can take a peek at what the professionals are predicting.



Are Data#3 Insiders Aligned With All Shareholders?

Like the kids in the streets standing up for their beliefs, insider share purchases give me reason to believe in a brighter future. That's because insider buying often indicates that those closest to the company have confidence that the share price will perform well. However, insiders are sometimes wrong, and we don't know the exact thinking behind their acquisitions.

Not only did Data#3 insiders refrain from selling stock during the year, but they also spent AU$198k buying it. That puts the company in a nice light, as it makes me think its leaders are feeling confident. Zooming in, we can see that the biggest insider purchase was by Independent Non-Executive Chairman Richard Anderson for AU$50k worth of shares, at about AU$5.00 per share.

On top of the insider buying, it's good to see that Data#3 insiders have a valuable investment in the business. To be specific, they have AU$33m worth of shares. That's a lot of money, and no small incentive to work hard. Even though that's only about 3.9% of the company, it's enough money to indicate alignment between the leaders of the business and ordinary shareholders.

Should You Add Data#3 To Your Watchlist?

You can't deny that Data#3 has grown its earnings per share at a very impressive rate. That's attractive. On top of that, insiders own a significant stake in the company and have been buying more shares. So I do think this is one stock worth watching. Even so, be aware that  Data#3 is showing  1 warning sign in our investment analysis, you should know about...

As a growth investor I do like to see insider buying. But Data#3 isn't the only one. You can see a a free list of them here.

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.