Here’s where I start my search for the next big small cap

Every minute of every day, investors dream of finding the next big thing. A small cap company which will grow rapidly over coming years resulting in the company’s share price doubling many times over.

If you are like me you will have listened enviously as other investors recount stories of buying Westfield Corp Ltd (ASX:WFD) or Commonwealth Bank of Australia (ASX:CBA) at some ridiculous price when they first hit the market.

While some investors like to buy in at the initial public offering, in the belief that the prospectus is a true reflection of the company’s future. I prefer to see runs on the board before investing.

Appendix 4C

In summary the report indicates the sales made in the quarter the costs incurred along with the remaining cash balance.

New investors will most likely be overwhelmed by the number of 4C reports released at the end of each quarter. To separate the wheat from the chaff at this stage I suggest only looking at companies which are actually producing revenue.

You will find this in the very top corner of the report. This will exclude most of the small cap exploration companies making the task much easier.

Next only consider companies which have grown revenue over the previous quarter. I recently learned that legendary investor Peter Lynch excluded companies whose revenue had grown by over 25% but I prefer to keep these companies under watch.

Once these companies have been found I suggest looking at the their quarterly activities report which is usually released with the 4C. While the 4C has a standard format, activity reports come in all shapes and sizes.

It is important for new investors to realize the activity report can be very much a marketing exercise but investors can quickly learn from this report the business conducted by the company. From here they can start to decide if they are able to understand what the company does and in turn possible risks etc.

Now that I have a list of growing companies running a business I can understand, I start to review past 4C reports.

Here I am looking to understand if revenue has been growing steadily or the recent report was a one off. Here I can also quickly learn if costs are continuing to rise or are they starting to level off which should see a growing cash balance. (positive cash flow)

From the 4C, remaining cash balance (found at the very bottom) will also alert you to how soon the company may need to raise capital from the market.

Conclusion

While there are never any sure things, I have been able to locate many profitable companies by this process including most recently Paragon Care Ltd. (ASX:PGC) and Nanosonics Ltd. (ASX:NAN) .

I suggest to new investors that this should be only the beginning of your research on a particularly company. From here you may check out the companies website. read annual reports and start looking for any broker coverage to help your understanding of what makes the company tick.

Disclosure:
Please Note: None of the above should be considered investment advice. These are my own opinions based on a number of years market experience. Please do your own research and consult a qualified financial advisor if you wish to invest.

Author: Alonzo

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