If EPS growth is important to you, Synopsys (NASDAQ:SNPS) presents an opportunity

For beginners, it may seem like a good idea (and an exciting prospect) to buy a company that tells investors a good story, even if it doesn’t currently have a track record of revenue and profits. Unfortunately, these high-risk investments often have little chance of returning, and many investors pay the price to learn their lesson. A loss-making company has yet to prove its worth with a profit, and the influx of outside capital may eventually dry up.

In contrast to all this, many investors prefer to focus on companies such as Abstract (NASDAQ:SNPS), which has not only revenues but also profits. Even if this company is fairly valued by the market, investors would agree that generating consistent profits will continue to provide Synopsys with the means to add long-term shareholder value.

Check out our latest analysis for Synopsys

Synopsys earnings per share are rising

The market is a voting machine in the short term but a weighing machine in the long term, so you would expect the share price to eventually follow the earnings per share (EPS) numbers. That’s why there are many investors who like to buy stocks in companies that are growing EPS. Shareholders will be pleased to learn that Synopsys’ EPS is up 26% per year, compounded, over three years. That has undoubtedly fueled the optimism that the stock is trading at a high multiple of earnings.

It’s often helpful to look at earnings before interest and taxes (EBIT) margins, as well as revenue growth, to get a different perspective on the quality of a company’s growth. Synopsys maintained stable EBIT margins over the past year while growing revenue 26% to $6.5 billion. That’s progress.

The chart below shows how the company’s profits and losses have changed over time. To see the actual numbers, click on the chart.

You don’t drive while looking in the rearview mirror, so this might interest you more free a report showing analysts’ forecasts for Synopsys future profits.

Are Synopsys insiders related to all shareholders?

We wouldn’t expect insiders to own a large percentage of a $80 billion company like Synopsys. But we take comfort in the fact that they are investors in the company. We note that their impressive stake in the company is worth $468 million. While that’s a large stake in the game, we note that this stake only represents 0.6% of the company, which is a result of the company’s large size. So despite the low percentage, the company’s management still has plenty of incentive to deliver the best results for investors.

While it’s always good to see strong insider conviction in a company through large investments, it’s also important for shareholders to ask whether the management compensation policy is sound. Well, considering CEO compensation, one could argue that it is. Our analysis shows that the median total CEO compensation of companies like Synopsys, with a market capitalization above $8.0 billion, is around $13 million.

The Synopsys CEO received a total compensation package worth $10 million in the year to October 2023. This is below average for companies of similar size and seems quite reasonable. CEO compensation levels are not the most important metric for investors, but when the salary is modest, it does support a better alignment between the CEO and common shareholders. Generally, one could argue that reasonable compensation levels indicate good decision-making.

Is Synopsys worth adding to your watchlist?

There’s no denying that Synopsys has grown its earnings per share at an impressive rate. That’s attractive. If you need something more convincing beyond that EPS growth rate, don’t forget the reasonable compensation and high insider ownership. This may be just a quick summary, but the bottom line is that Synopsys is worth a look. If you think Synopsys might fit your style as an investor, you can go straight to its annual report or check out our discounted cash flow (DCF) valuation for the company first.

While Synopsys certainly looks good, it could attract more investors if insiders start buying shares. If you like to see companies with a bigger stake in the game, check out this handpicked selection of companies that not only have strong growth but also strong insider support.

Please note that the confidential transactions discussed in this article refer to reportable transactions in the relevant jurisdiction.

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This Simply Wall St article is for general information purposes only. Our commentary is based solely on historical data and analyst forecasts, and is based on an objective methodology. Our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or your financial situation. Our goal is to provide you with long-term, focused analysis based on fundamental data. Please note that our analysis may not reflect the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.