Investors are often guided by the idea of discovering ‘the next big thing’, even if that means buying ‘story stocks’ without any revenue, let alone profit. But as Peter Lynch said in One Up On Wall Street, ‘Long shots almost never pay off.’ A loss-making company is yet to prove itself with profit, and eventually the inflow of external capital may dry up.
If this kind of company isn’t your style, you like companies that generate revenue, and even earn profits, then you may well be interested in Xylem (NYSE:XYL). 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.
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The market is a voting machine in the short term, but a weighing machine in the long term, so you’d expect share price to follow earnings per share (EPS) outcomes eventually. Therefore, there are plenty of investors who like to buy shares in companies that are growing EPS. It certainly is nice to see that Xylem has managed to grow EPS by 30% per year over three years. As a general rule, we’d say that if a company can keep up that sort of growth, shareholders will be beaming.
One way to double-check a company’s growth is to look at how its revenue, and earnings before interest and tax (EBIT) margins are changing. While we note Xylem achieved similar EBIT margins to last year, revenue grew by a solid 5.6% to US$8.9b. 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.
View our latest analysis for Xylem
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 Xylem’s future EPS 100% free.
We would not expect to see insiders owning a large percentage of a US$34b company like Xylem. But we are reassured by the fact they have invested in the company. We note that their impressive stake in the company is worth US$194m. This comes in at 0.6% of shares in the company, which is a fair amount of a business of this size. This still shows shareholders there is a degree of alignment between management and themselves.
While it’s always good to see some strong conviction in the company from insiders through heavy investment, it’s also important for shareholders to ask if management compensation policies are reasonable. Well, based on the CEO pay, you’d argue that they are indeed. Our analysis has discovered that the median total compensation for the CEOs of companies like Xylem, with market caps over US$8.0b, is about US$13m.