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 the reality is that when a company loses money each year, for long enough, its investors will usually take their share of those losses. While a well funded company may sustain losses for years, it will need to generate a profit eventually, or else investors will move on and the company will wither away.

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 Johnson Electric Holdings (HKG:179). 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.

Johnson Electric Holdings' Improving Profits

Even with very modest growth rates, a company will usually do well if it improves earnings per share (EPS) year after year. So EPS growth can certainly encourage an investor to take note of a stock. Johnson Electric Holdings' EPS skyrocketed from US$0.17 to US$0.25, in just one year; a result that's bound to bring a smile to shareholders. That's a fantastic gain of 42%.

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. The good news is that Johnson Electric Holdings is growing revenues, and EBIT margins improved by 2.6 percentage points to 7.6%, over the last year. Ticking those two boxes is a good sign of growth, in our book.

You can take a look at the company's revenue and earnings growth trend, in the chart below. For finer detail, click on the image.

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 Johnson Electric Holdings' future EPS 100% free.

Are Johnson Electric Holdings Insiders Aligned With All Shareholders?

Investors are always searching for a vote of confidence in the companies they hold and insider buying is one of the key indicators for optimism on the market. This view is based on the possibility that stock purchases signal bullishness on behalf of the buyer. However, small purchases are not always indicative of conviction, and insiders don't always get it right.

One shining light for Johnson Electric Holdings is the serious outlay one insider has made to buy shares, in the last year. Indeed, Honorary Chairman Yik-Chun Wang Koo has accumulated shares over the last year, paying a total of US$18m at an average price of about US$11.46. Seeing such high conviction in the company is a huge positive for shareholders and should instil confidence in their mission.

On top of the insider buying, we can also see that Johnson Electric Holdings insiders own a large chunk of the company. In fact, they own 69% of the company, so they will share in the same delights and challenges experienced by the ordinary shareholders. This should be seen as a good thing, as it means insiders have a personal interest in delivering the best outcomes for shareholders. And their holding is extremely valuable at the current share price, totalling US$7.3b. That level of investment from insiders is nothing to sneeze at.

Is Johnson Electric Holdings Worth Keeping An Eye On?

You can't deny that Johnson Electric Holdings has grown its earnings per share at a very impressive rate. That's attractive. Better still, insiders own a large chunk of the company and one has even been buying more shares. So it's fair to say that this stock may well deserve a spot on your watchlist. It's still necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Johnson Electric Holdings (at least 1 which is significant) , and understanding them should be part of your investment process.

The good news is that Johnson Electric Holdings is not the only stock with insider buying. Here's a list of small cap, undervalued companies in HK with insider buying in the last three months!

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.