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 currently lacks a track record of revenue and profit. But as Peter Lynch said in One Up On Wall Street, ‘Long shots almost never pay off.’ 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 Tenet Healthcare (NYSE:THC), which has not only revenues, but also profits. 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.
View our latest analysis for Tenet Healthcare
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. Recognition must be given to the that Tenet Healthcare has grown EPS by 48% per year, over the last three years. Growth that fast may well be fleeting, but it should be more than enough to pique the interest of the wary stock pickers.
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. While we note Tenet Healthcare achieved similar EBIT margins to last year, revenue grew by a solid 4.0% to US$21b. That’s progress.
In the chart below, you can see how the company has grown earnings and revenue, over time. Click on the chart to see the exact numbers.
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 Tenet Healthcare’s future EPS 100% free.
We would not expect to see insiders owning a large percentage of a US$14b company like Tenet Healthcare. But we do take comfort from the fact that they are investors in the company. Indeed, they have a considerable amount of wealth invested in it, currently valued at US$143m. This suggests that leadership will be very mindful of shareholders’ interests when making decisions!
Tenet Healthcare’s earnings per share growth have been climbing higher at an appreciable rate. That sort of growth is nothing short of eye-catching, and the large investment held by insiders should certainly brighten the view of the company. At times fast EPS growth is a sign the business has reached an inflection point, so there’s a potential opportunity to be had here. So based on this quick analysis, we do think it’s worth considering Tenet Healthcare for a spot on your watchlist. Still, you should learn about the 4 warning signs we’ve spotted with Tenet Healthcare (including 1 which is significant).
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