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.  Unfortunately, these high risk investments often have little probability of ever paying off, and many investors pay a price to learn their lesson.  Loss making companies can act like a sponge for capital - so investors should be cautious that they're not throwing good money after bad.

Despite being in the age of tech-stock blue-sky investing, many investors still adopt a more traditional strategy; buying shares in profitable companies like Allison Transmission Holdings (NYSE:ALSN). While profit isn't the sole metric that should be considered when investing, it's worth recognising businesses that can consistently produce it.

How Fast Is Allison Transmission Holdings Growing?

Generally, companies experiencing growth in earnings per share (EPS) should see similar trends in share price.  That means EPS growth is considered a real positive by most successful long-term investors.   To the delight of shareholders, Allison Transmission Holdings has achieved impressive annual EPS growth of 46%, compound, over the last three years.  Growth that fast may well be fleeting, but it should be more than enough to pique the interest of the wary stock pickers.  

Careful consideration of revenue growth and earnings before interest and taxation (EBIT) margins can help inform a view on the sustainability of the recent profit growth.    EBIT margins for Allison Transmission Holdings remained fairly unchanged over the last year, however the company should be pleased to report its revenue growth for the period of 8.8% to US$3.1b.  That's a real positive.  

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.

NYSE:ALSN Earnings and Revenue History June 4th 2024

Of course the knack is to find stocks that have their best days in the future, not in the past. You could base your opinion on past performance, of course, but you may also want to check this interactive graph of professional analyst EPS forecasts for Allison Transmission Holdings.

Are Allison Transmission Holdings Insiders Aligned With All Shareholders?

Owing to the size of Allison Transmission Holdings, we wouldn't expect insiders to hold a significant proportion of the company.  But we do take comfort from the fact that they are investors in the company.     To be specific, they have US$43m worth of shares.  This considerable investment should help drive long-term value in the business.   While their ownership only accounts for 0.6%, this is still a considerable amount at stake to encourage the business to maintain a strategy that will deliver value to shareholders.  

Should You Add Allison Transmission Holdings To Your Watchlist?

Allison Transmission Holdings' earnings have taken off in quite an impressive fashion.   This level of EPS growth does wonders for attracting investment, and the large insider investment in the company is just the cherry on top.  The hope is, of course, that the strong growth marks a fundamental improvement in the business economics.  So at the surface level, Allison Transmission Holdings is worth putting on your watchlist; after all, shareholders do well when the market underestimates fast growing companies.     We don't want to rain on the parade too much, but we did also find 2 warning signs for Allison Transmission Holdings that you need to be mindful of.  

There's always the possibility of doing well buying stocks that are not growing earnings and do not have insiders buying shares. But for those who consider these important metrics, we encourage you to check out companies that do have those features. You can access a tailored list of  companies which have demonstrated growth backed by significant insider holdings.

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.