Does Aspen Technology (NASDAQ:AZPN) Deserve A Spot On Your Watchlist?
For beginners, it can seem like a good idea (and an exciting prospect) to buy a company that tells a good story to investors, even if it completely lacks a track record of revenue and profit. Unfortunately, high risk investments often have little probability of ever paying off, and many investors pay a price to learn their lesson.
In contrast to all that, I prefer to spend time on companies like Aspen Technology (NASDAQ:AZPN), which has not only revenues, but also profits. While profit is not necessarily a social good, it's easy to admire a business that can consistently produce it. Conversely, a loss-making company is yet to prove itself with profit, and eventually the sweet milk of external capital may run sour.
View our latest analysis for Aspen Technology
How Quickly Is Aspen Technology Increasing Earnings Per Share?
If you believe that markets are even vaguely efficient, then over the long term you'd expect a company's share price to follow its earnings per share (EPS). That makes EPS growth an attractive quality for any company. Aspen Technology managed to grow EPS by 6.4% per year, over three years. That might not be particularly high growth, but it does show that per-share earnings are moving steadily in the right direction.
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. The good news is that Aspen Technology is growing revenues, and EBIT margins improved by 9.2 percentage points to 51%, over the last year. That's great to see, on both counts.
The chart below shows how the company's bottom and top lines have progressed over time. Click on the chart to see the exact numbers.
Fortunately, we've got access to analyst forecasts of Aspen Technology's future profits. You can do your own forecasts without looking, or you can take a peek at what the professionals are predicting.
Are Aspen Technology Insiders Aligned With All Shareholders?
We would not expect to see insiders owning a large percentage of a US$10.0b company like Aspen Technology. But we do take comfort from the fact that they are investors in the company. To be specific, they have US$38m worth of shares. That's a lot of money, and no small incentive to work hard. Despite being just 0.4% of the company, the value of that investment is enough to show insiders have plenty riding on the venture.
It's good to see that insiders are invested in the company, but are remuneration levels reasonable? A brief analysis of the CEO compensation suggests they are. For companies with market capitalizations over US$8.0b, like Aspen Technology, the median CEO pay is around US$11m.
Aspen Technology offered total compensation worth US$8.4m to its CEO in the year to . That seems pretty reasonable, especially given its below the median for similar sized companies. 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. I'd also argue reasonable pay levels attest to good decision making more generally.
Does Aspen Technology Deserve A Spot On Your Watchlist?
As I already mentioned, Aspen Technology is a growing business, which is what I like to see. The fact that EPS is growing is a genuine positive for Aspen Technology, but the pretty picture gets better than that. Boasting both modest CEO pay and considerable insider ownership, I'd argue this one is worthy of the watchlist, at least. However, before you get too excited we've discovered 1 warning sign for Aspen Technology that you should be aware of.
Of course, you can do well (sometimes) buying stocks that are not growing earnings and do not have insiders buying shares. But as a growth investor I always like to check out companies that do have those features. You can access a free list of them here.
Please note the insider transactions discussed in this article refer to reportable transactions in the relevant jurisdiction.
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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