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. Loss making companies can act like a sponge for capital - so investors should be cautious that they're not throwing good money after bad.

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

View our latest analysis for Transmetro

How Quickly Is Transmetro Increasing Earnings Per Share?

If a company can keep growing earnings per share (EPS) long enough, its share price should eventually follow. That means EPS growth is considered a real positive by most successful long-term investors. Impressively, Transmetro has grown EPS by 24% per year, compound, in the last three years. If the company can sustain that sort of growth, we'd expect shareholders to come away satisfied.

Top-line growth is a great indicator that growth is sustainable, and combined with a high earnings before interest and taxation (EBIT) margin, it's a great way for a company to maintain a competitive advantage in the market. It's noted that Transmetro's revenue from operations was lower than its revenue in the last twelve months, so that could distort our analysis of its margins. We note that while EBIT margins have improved from 9.4% to 17%, the company has actually reported a fall in revenue by 8.9%. That's not a good look.

In the chart below, you can see how the company has grown earnings and revenue, over time. For finer detail, click on the image.

Since Transmetro is no giant, with a market capitalisation of AU$25m, you should definitely check its cash and debt before getting too excited about its prospects.

Are Transmetro Insiders Aligned With All Shareholders?

Seeing insiders owning a large portion of the shares on issue is often a good sign. Their incentives will be aligned with the investors and there's less of a probability in a sudden sell-off that would impact the share price. So those who are interested in Transmetro will be delighted to know that insiders have shown their belief, holding a large proportion of the company's shares. Owning 46% of the company, insiders have plenty riding on the performance of the the share price. Shareholders and speculators should be reassured by this kind of alignment, as it suggests the business will be run for the benefit of shareholders. Of course, Transmetro is a very small company, with a market cap of only AU$25m. So this large proportion of shares owned by insiders only amounts to AU$12m. That's not a huge stake in absolute terms, but it should help keep insiders aligned with other shareholders.

Should You Add Transmetro To Your Watchlist?

If you believe that share price follows earnings per share you should definitely be delving further into Transmetro's strong EPS growth. Further, the high level of insider ownership is impressive and suggests that the management appreciates the EPS growth and has faith in Transmetro's continuing strength. Fast growth and confident insiders should be enough to warrant further research, so it would seem that it's a good stock to follow. It's still necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Transmetro (at least 1 which is a bit unpleasant) , and understanding them should be part of your investment process.

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 Australian 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.