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. A loss-making company is yet to prove itself with profit, and eventually the inflow of external capital may dry up.

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 Automotive Systems (NASDAQ:CAAS). 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.

See our latest analysis for China Automotive Systems

China Automotive Systems' Improving Profits

In the last three years China Automotive Systems' 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. As a result, we'll zoom in on growth over the last year, instead. China Automotive Systems' EPS skyrocketed from US$0.92 to US$1.30, in just one year; a result that's bound to bring a smile to shareholders. That's a commendable gain of 41%.

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. China Automotive Systems shareholders can take confidence from the fact that EBIT margins are up from 3.2% to 7.2%, and revenue is growing. Ticking those two boxes is a good sign of growth, in our book.

You can take a look at the company's revenue and earnings growth trend, in the chart below. To see the actual numbers, click on the chart.

China Automotive Systems isn't a huge company, given its market capitalisation of US$124m. That makes it extra important to check on its balance sheet strength.

Are China Automotive Systems Insiders Aligned With All Shareholders?

It's said that there's no smoke without fire. For investors, insider buying is often the smoke that indicates which stocks could set the market alight. This view is based on the possibility that stock purchases signal bullishness on behalf of the buyer. However, insiders are sometimes wrong, and we don't know the exact thinking behind their acquisitions.

We haven't seen any insiders selling China Automotive Systems shares, in the last year. So it's definitely nice that Chief Financial Officer Jie Li bought US$19k worth of shares at an average price of around US$3.22. Decent buying like this could be a sign for shareholders here; management sees the company as undervalued.

On top of the insider buying, we can also see that China Automotive Systems insiders own a large chunk of the company. To be exact, company insiders hold 56% of the company, so their decisions have a significant impact on their investments. Intuition will tell you this is a good sign because it suggests they will be incentivised to build value for shareholders over the long term. To give you an idea, the value of insiders' holdings in the business are valued at US$70m at the current share price. That's nothing to sneeze at!

Shareholders have more to smile about than just insiders adding more shares to their already sizeable holdings. That's because China Automotive Systems' CEO, Qizhou Wu, is paid at a relatively modest level when compared to other CEOs for companies of this size. For companies with market capitalisations under US$200m, like China Automotive Systems, the median CEO pay is around US$685k.

The China Automotive Systems CEO received total compensation of just US$255k in the year to December 2023. First impressions seem to indicate a compensation policy that is favourable to shareholders. 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 good governance, more generally.

Is China Automotive Systems Worth Keeping An Eye On?

For growth investors, China Automotive Systems' raw rate of earnings growth is a beacon in the night. On top of that, insiders own a significant piece of the pie when it comes to the company's stock, and one has been buying more. So it's fair to say that this stock may well deserve a spot on your watchlist. Of course, profit growth is one thing but it's even better if China Automotive Systems is receiving high returns on equity, since that should imply it can keep growing without much need for capital. Click on this link to see how it is faring against the average in its industry.

The good news is that China Automotive Systems is not the only stock with insider buying. Here's a list of small cap, undervalued companies in the US 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.

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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.

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