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.'  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 Advanced Drainage Systems (NYSE:WMS). Even if this company is fairly valued by the market, investors would agree that generating consistent profits will continue to provide Advanced Drainage Systems with the means to add long-term value to shareholders.

How Quickly Is Advanced Drainage Systems Increasing Earnings Per Share?

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.  That means EPS growth is considered a real positive by most successful long-term investors.   Advanced Drainage Systems' shareholders have have plenty to be happy about as their annual EPS growth for the last 3 years was 38%.  That sort of growth rarely ever lasts long, but it is well worth paying attention to when it happens.  

It's often helpful to take a look at earnings before interest and tax (EBIT) margins, as well as revenue growth, to get another take on the quality of the company's growth.    Unfortunately, Advanced Drainage Systems' revenue dropped 9.4% last year, but the silver lining is that EBIT margins improved from 23% to 25%.  While not disastrous, these figures could be better.  

In the chart below, you can see how the company has grown earnings and revenue, over time.  To see the actual numbers, click on the chart.

NYSE:WMS Earnings and Revenue History April 21st 2024

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

Are Advanced Drainage Systems Insiders Aligned With All Shareholders?

We would not expect to see insiders owning a large percentage of a US$12b company like Advanced Drainage Systems.  But we do take comfort from the fact that they are investors in the company.     Notably, they have an enviable stake in the company, worth US$169m.   Holders should find this level of insider commitment quite encouraging, since it would ensure that the leaders of the company would also experience their success, or failure, with the stock.  

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.  A brief analysis of the CEO compensation suggests they are.    The median total compensation for CEOs of companies similar in size to Advanced Drainage Systems, with market caps over US$8.0b, is around US$13m.  

Advanced Drainage Systems offered total compensation worth US$7.0m to its CEO in the year to March 2023.  That seems pretty reasonable, especially given it's below the median for similar sized companies.   While the level of CEO compensation shouldn't be the biggest factor in how the company is viewed, modest remuneration is a positive, because it suggests that the board keeps shareholder interests in mind.  Generally, arguments can be made that reasonable pay levels attest to good decision-making.

Does Advanced Drainage Systems Deserve A Spot On Your Watchlist?

Advanced Drainage Systems' earnings have taken off in quite an impressive fashion.   An added bonus for those interested is that management hold a heap of stock and the CEO pay is quite reasonable, illustrating good cash management.  The strong EPS improvement suggests the businesses is humming along.  Big growth can make big winners, so the writing on the wall tells us that Advanced Drainage Systems is worth considering carefully.     We should say that we've discovered 2 warning signs for Advanced Drainage Systems that you should be aware of before investing here.  

Although Advanced Drainage Systems certainly looks good, it may appeal to more investors if insiders were buying up shares. If you like to see companies with insider buying, then check out this handpicked selection of  companies that not only boast of strong growth but have also seen recent insider buying..

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.