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Should You Be Adding China Petroleum & Chemical (HKG:386) To Your Watchlist Today?

Simply Wall St ·  {{timeTz}}

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. 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 are always racing against time to reach financial sustainability, so investors in these companies may be taking on more risk than they should.

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 China Petroleum & Chemical (HKG:386). While profit isn't the sole metric that should be considered when investing, it's worth recognising businesses that can consistently produce it.

Check out our latest analysis for China Petroleum & Chemical

How Fast Is China Petroleum & Chemical 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. Over the last three years, China Petroleum & Chemical has grown EPS by 9.5% per year. That's a good rate of growth, if it can be sustained.

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. It's noted that, last year, China Petroleum & Chemical's revenue from operations was lower than its revenue, so that could distort our analysis of its margins. EBIT margins for China Petroleum & Chemical remained fairly unchanged over the last year, however the company should be pleased to report its revenue growth for the period of 38% to CN¥2.9t. That's progress.

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.

earnings-and-revenue-historySEHK:386 Earnings and Revenue History August 9th 2022

While we live in the present moment, there's little doubt that the future matters most in the investment decision process. So why not check this interactive chart depicting future EPS estimates, for China Petroleum & Chemical?

Are China Petroleum & Chemical Insiders Aligned With All Shareholders?

We would not expect to see insiders owning a large percentage of a HK$550b company like China Petroleum & Chemical. But we are reassured by the fact they have invested in the company. Given insiders own a significant chunk of shares, currently valued at CN¥727m, they have plenty of motivation to push the business to succeed. This would indicate that the goals of shareholders and management are one and the same.

It's good to see that insiders are invested in the company, but are remuneration levels reasonable? Our quick analysis into CEO remuneration would seem to indicate they are. Our analysis has discovered that the median total compensation for the CEOs of companies like China Petroleum & Chemical, with market caps over CN¥54b, is about CN¥6.7m.

The CEO of China Petroleum & Chemical was paid just CN¥442k in total compensation for the year ending December 2021. This could be considered a token amount, and indicates that the company does not need to use payment to motivate the CEO - that is often a good sign. CEO remuneration levels are not the most important metric for investors, but when the pay is modest, that does support enhanced alignment between the CEO and the ordinary shareholders. Generally, arguments can be made that reasonable pay levels attest to good decision-making.

Should You Add China Petroleum & Chemical To Your Watchlist?

One positive for China Petroleum & Chemical is that it is growing EPS. That's nice to see. Earnings growth might be the main attraction for China Petroleum & Chemical, but the fun does not stop there. Boasting both modest CEO pay and considerable insider ownership, you'd argue this one is worthy of the watchlist, at least. It's still necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with China Petroleum & Chemical (at least 1 which can't be ignored) , and understanding these should be part of your investment process.

The beauty of investing is that you can invest in almost any company you want. But if you prefer to focus on stocks that have demonstrated insider buying, here is a list of companies 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.

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