Companies that keep raising sales are the kind that push for business growth whether they have a good year or bad year. However, the best long-term investments are in stocks that can generate decent profits that translate into higher dividends and share prices.
Big revenues can get eaten up by the cost of doing business. If the company has to reinvest most of its gross earnings back into the business just to stay afloat and competitive, shareholder returns may not grow so well.
Here are three companies that have both growing revenue and sizeable profit margins. Enough money can go back into the company for further growth and profits can expand as well.
Senex Energy Ltd (ASX: SXY), the energy producer operating in the Cooper and Surat Basin areas, set a record interim result in the first half of FY2014 with a 14% gain in revenue to $88.3 million. It expects even further increases in production for FY2014, with five new oil accumulations discovered.
Since mid-2012, its share price has been going sideways between $0.60 and $0.90 cents. Currently it is $0.71c with an 11 PE. In FY2013 its underlying net profit margin was 44% and in the first half of FY2014 it achieved an equally impressive 36%. All the while it has no debt.
Fund manager BT Investment Management Ltd (ASX: BTT) has more than doubled revenue in the last two years. Its largest shareholder is Westpac Banking Corp (ASX: WBC), for which it provides wealth management services. In addition, it is expanding its multi-boutique business model to attract new fund managers.
It achieved a 23.8% underlying net profit margin on $260 million in revenue in FY2013. It has a PE of 20.7 and a dividend yield of 3.7%.
Diversified mining company Rio Tinto Limited (ASX: RIO) has overseen a great expansion in its iron ore production and its 2013 full year underlying net profit is well above 2012. Revenue was up 16.5% and back in line with previous years. Its dividend yield is 1.5%.
For its other divisions, aluminium increased its underlying earnings, while its energy division which includes coal, was way down in earnings. This reflects the difficulty low coal prices are creating for the industry.
The majority of group underlying net profit comes from iron ore, so as the company works towards its target of 320 million tonnes in annual production capacity, the higher iron ore prices will generate higher earnings.
Foolish takeaway
Always look for strong revenues and decent profit margins to give your investment the best chance to grow for you.
