Here’s why Spectrum Electrical Industries (NSE:SPECTRUM) has caught investors’ attention

The excitement of investing in a company that can turn things around is a major draw for some speculators, so even companies that have no revenue, no profits, and a history of making mistakes can succeed in finding investors. But as Peter Lynch said in Ahead of Wall Street, “Far plans almost never pay off.” Loss-making companies can act as a sponge for capital. Investors should therefore be careful not to waste money after losing it.

In contrast to all this, many investors prefer to focus on companies like Spectrum Electrical Industries (NSE:SPECTRUM), which generates not only revenues but also profits. Even if this company is fairly valued by the market, investors will agree that generating consistent profits will continue to provide Spectrum Electrical Industries with the means to add long-term value to shareholders.

Check out our latest analysis for Spectrum Electrical Industries

How fast are the spectrum electrical industries growing?

The market is a voting machine in the short term, but a weighing machine in the long term. We can therefore expect the share price to eventually follow the earnings per share (EPS) results. This makes EPS growth an attractive quality for any business. Admittedly, Spectrum Electrical Industries has grown its EPS by 49% per year over the last three years. Although this type of growth rate is not sustainable in the long term, it certainly attracts the attention of potential investors.

A close look at revenue growth and earnings before interest and tax (EBIT) margins can help inform a view on the sustainability of the recent profit growth. Music to Spectrum Electrical Industries shareholders’ ears is that EBIT margins have increased from 7.1% to 11% over the last 12 months, and revenue is also on an upward trend. These are both great indicators to check potential growth.

In the chart below, you can see how the company has grown its profits and revenue over time. Click on the chart to see the exact numbers.

While it’s always good to see earnings growth, we should never forget that a weak balance sheet could work against us. So check Spectrum Electrical Industries’ balance sheet strength before getting too excited.

Are Spectrum Electrical Industries insiders aligned with all shareholders?

Many consider a high number of inside shareholders to be a strong sign of alignment between a company’s management and common shareholders. We are therefore pleased to announce that internal shareholders of Spectrum Electrical Industries own a significant share of the company. In fact, they own 66% of the company, which will allow them to share the same joys and challenges as ordinary shareholders. It is therefore obvious that they will be encouraged to plan for the long term, which is positive for shareholders who adopt a strategy of remaining seated. This means that they have a significant part of their own capital that depends on the performance of the company!

While it’s always good to see strong conviction in the company from insiders through massive investment, it’s also important for shareholders to question whether executive compensation policies are reasonable. Our quick analysis of CEO compensation seems to indicate that this is the case. The median total compensation for CEOs of companies similar in size to Spectrum Electrical Industries, with market capitalization between ₹17 billion and ₹67 billion, is around ₹23 million.

The CEO of Spectrum Electrical Industries took home total compensation worth ₹12 million in the year to March 2023. That’s actually lower than the median for CEOs at similarly sized companies. CEO compensation isn’t the most important aspect to consider in a company, but when it’s reasonable, it gives a little more confidence that executives are looking out for shareholders’ interests. It can also be a sign of good governance, more generally.

Should you add Spectrum Electrical Industries to your watchlist?

Spectrum Electrical Industries’ earnings have taken off quite impressively. The cherry on top is that insiders own a large number of shares, and CEO compensation actually looks quite reasonable. The strong improvement in EPS suggests that the business is doing well. Spectrum Electrical Industries is certainly doing some things right, and is worth looking at. However, before you get too excited, we’ve found out 2 Warning Signs for Spectrum Electrical Industries (1 cannot be ignored!) which you should be aware of.

There is always the possibility of doing well by buying stocks that are not profit growth and not have insiders buying shares. But for those who are taking these important steps into account, we encourage you to check out companies that TO DO have these characteristics. You can access a personalized list of Indian companies that have demonstrated growth supported by significant internal participations.

Please note that the insider transactions discussed in this article refer to reportable transactions in the relevant jurisdiction.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to constitute financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your objectives or your financial situation. Our goal is to provide you with targeted, long-term analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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