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.' 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 Severn Trent (LON:SVT). While this doesn't necessarily speak to whether it's undervalued, the profitability of the business is enough to warrant some appreciation - especially if its growing.

Severn Trent's Improving Profits

In the last three years Severn Trent's earnings per share took off; so much so that it's a bit disingenuous to use these figures to try and deduce long term estimates. So it would be better to isolate the growth rate over the last year for our analysis. Outstandingly, Severn Trent's EPS shot from UK£0.42 to UK£0.77, over the last year. Year on year growth of 83% is certainly a sight to behold.

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. While we note Severn Trent achieved similar EBIT margins to last year, revenue grew by a solid 5.4% to UK£2.4b. That's progress.

The chart below shows how the company's bottom and top lines have progressed over time. For finer detail, click on the image.LSE:SVT Earnings and Revenue History April 1st 2025

View our latest analysis for Severn Trent

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 Severn Trent's future EPS 100% free.

Are Severn Trent Insiders Aligned With All Shareholders?

We would not expect to see insiders owning a large percentage of a UK£7.6b company like Severn Trent. But we do take comfort from the fact that they are investors in the company. To be specific, they have UK£14m worth of shares. That shows significant buy-in, and may indicate conviction in the business strategy. Even though that's only about 0.2% of the company, it's enough money to indicate alignment between the leaders of the business and ordinary shareholders.

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. For companies with market capitalisations over UK£6.2b, like Severn Trent, the median CEO pay is around UK£5.1m.

Story Continues

The Severn Trent CEO received UK£3.2m in compensation for the year ending March 2024. That comes in below the average for similar sized companies and seems pretty reasonable. 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. It can also be a sign of a culture of integrity, in a broader sense.

Is Severn Trent Worth Keeping An Eye On?

Severn Trent's 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 drastic earnings growth indicates the business is going from strength to strength. Hopefully a trend that continues well into the future. Big growth can make big winners, so the writing on the wall tells us that Severn Trent is worth considering carefully. It's still necessary to consider the ever-present spectre of investment risk.  We've identified 2 warning signs  with Severn Trent , and understanding these 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 British 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.

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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