A Growing UK Business for 4x FCF
Revenues have increased 320% in 6 years and it has a ROE of 30%.
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Today’s business is operates from the UK.
They also operate international offices in New York and Amsterdam, and was founded in 2001.
The market cap is £5.45m and the enterprise value is £3.47m.
I calculate the EV using all debt-like obligations offset by all cash and marketable securities.
Over the last few years the business has averaged £877k in annual FCF.
The three year average figure seems like the most appropriate to use here.
This excludes the COVID distortions and the legacy business model that the 5 year average would include.
£877k is what we would reasonably expect the business to produce on an annual basis going forward.
Here are the valuation ratios:
P/FCF Ratio = 6
EV/FCF Ratio = 4
There is absolutely zero downside protection in the assets.
The official equity figure is technically £2.8m, but by the time we have stripped away all the assets that couldn’t actually be sold for cash, in the real-world, it’s negative.
It’s a slight accounting illusion, which I’ll explain later.
This is a highly liquid operation, and the balance sheet is actually very healthy.
On average, they typically hold an unrestricted cash balance of £2.5m - £3.0m.
They also have virtually zero debt, aside from some small lease-liabilities.
In other words, they have more than enough liquidity to cover all their liabilities, but only as a going concern.
The negative equity scenario would only occur if they actually had to liquidate the business, in the real-world.
The current price implies the business is in severe terminal decline.
In fact, the market is saying that this business will cease generating cash within the next 5 years.
The reality in the reports is quite disconnected from this implication.
The business is actively growing revenues, very aggressively.
Pre-COVID, revenues were around £5.5m per year.
Last year, they hit £20m.
For the 18 months ending December 2025, they are projected to hit £29m.
They have also successfully entered the US market and expect this growth to continue.
In other words, they are far from a dying business.
The stock price decline
There are probably three core reasons for the stock price being cheap, relative to the underlying business value.
First, margins have been hit over recent years.
In 2022 they were 25%.
By 2024, they had fallen to 19%.
This was caused by inflation and cost-increases that they couldn’t pass on to their clients.
Next, they changed their accounting period to end in December rather than June.
This created a weird 18-month extended period that ran from July 2024 to December 2025.
I’ll admit this did make it tricky to figure out the financials in the normal way.
It obscured the annualised earnings trends and generated illusory figures in the financial statements.
Finally, the model has large swings in working capital that distort earnings, depending on which time of year it is.
Sometimes the business looks beautiful and other times it looks like a cash burning freak-show.
Given that most ‘investors’ don’t read as much as they probably should, this can cause sentiment to remain negative or indifferent.