Investor's Champion

Small cap scoring

Investor’s Champion small cap scoring system

Understandable business 5

It has to be easy to understand what they do, otherwise forget about it, it's not worth pursuing. This could be tough for some businesses and it might require a bit of work - but not too much!

Operating cash flow generation 10

We like to see operating cash flow of c100% operating profit with anything above that getting a high score and anything below a deduction. However, we also look at how this has been achieved.

Free cash generation 5

A little extra goes to free cash generation but acknowledge that as we are covering small caps spare cash should really be reinvested in the business.

Dividend yield 5

Companies should be prepared to give something back to shareholders on a regular basis, whatever stage of growth. We like to see a yield of c2% unless there are very good reasons not to. We much prefer a decent yield to the current fad for share buy backs.

Profitability 10

Good old fashioned 'Profit before tax' and profit margin. It's after any exceptional items as the latter always confuse us and with some companies exceptionals seem to appear again and again - you wonder why they get away with calling them exceptional. Although we do make an 'exception' for float costs when looking at new boys.

Earnings per share growth 5

Earnings per share should be growing and forecast to grow. A good score goes to those with a history of earnings growth. I know capital grows as earnings grow but its still a valid measure.

Return on Capital 5

A decent return on capital is always reassuring and worth a few bonus points.
 

Visibility and Recurring Revenue 5

It's nice to have comfort that predicted revenues will materialise and a decent dollop of recurring revenue.

Top line growth 5

We are assessing small caps here so growth is what bit's all about. If you are looking for stodgy pedestrian growth just stick to the main market.

Market potential 5

The company's underlying markets should be large and in good shape with high growth potential. Points will be deducted for declining markets.

Market position 5

We like to see companies that have a strong position and strong franchise in their market which will present high barriers to entry. If the overall market is relatively small they should dominate.

Products, Services and Reputation 5

The business should have strong product offering, a reputation for good service and where applicable strong brands. As we are unlikely to know everything there is to know about the market in question this one is going to be a little more arbitrary.

Tangible Asset backing 5

As we generally won't be considering property companies this category is less relevant to us. It's nice to give reassurance but really of less relevance to a growth play.

Management track record 5

Management's track record of delivering the goods and communicating their strategy and objectives to shareholder.

Management Ownership 5

We think it is key for management to be material shareholders in small caps and this isn't just through fancy share options. A c10% holding should be expected and management selling will be punished!

Directors Remuneration 5

We don't like to see management of small caps taking too much fixed salary out of the business - performance is the name of the game so a higher score is given for performance related pay structures with lower basics!

Valuation 10

Is the valuation reasonable and lets try and forget about peer group comparison for once - there's no point in buying if the price isn't right.

TOTAL 100