Earnings up 20%! But this UK small-cap stock may just be getting started

Are we about to see enduring growth from this UK small-cap business with a rising stock price ahead over the long term?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Young female business analyst looking at a graph chart while working from home

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

UK stock Renold (LSE: RNO) is backed by a business with a market capitalisation of around £140m. So it’s a small-cap enterprise and not for widows and orphans.

Nevertheless, the international supplier of industrial chains and related power transmission products has done its shareholders proud over the past few years. But director-speak makes me believe there may be more to come.

A multi-bagging share price

In the 2020 pandemic sell-off, the share price plunged to around 6p. Today (17 July), it’s near 59p, and the company just crowned that spectacular progress with a bumper set of full-year results.

Although small-cap stocks can be risky, they can sometimes also deliver high rewards for investors.

However, it would have taken a stout heart to buy the stock in the wake of the pandemic when economies were crashing. I first became interested in November 2021 and typed a bullish article with the stock near 30p.

It’s done all right since then, but chief executive Robert Purcell said in today’s report the business is now at an “inflection point”.  The compounding effect of many recent exciting initiatives is “coming to fruition”.

It’s hard to argue with that assessment. In the 12 months to 31 March 2024, adjusted earnings rose 20% year on year. Net debt dropped by more than 16% too, suggesting a strong cash performance backing up the business progress.

To top-off the positive feel to the report, the directors initiated a small dividend for the year of 0.5p per share. That’s the first in around 19 years, and I think that tells us something about the business and the sector — things can be tough for both.

There’s no denying the cyclicality present here. Indeed, a lot of the strong gains enjoyed by shareholders since 2020 have come from the business turning itself around. Even now, a half-decent general economic down-turn could pull the rug from revenues, earnings, cash flows, dividends, and the share price. To flirt with this stock is to flirt with such ongoing risks.

Steady growth ahead?

But Purcell is optimistic about the company’s future. Continuous improvement initiatives are building an “ever-improving” platform to support the directors’ commercial initiatives.

The focus is on targeting and consolidating the “highly fragmented industrial chain market” with an acquisitive growth strategy. There’s a rich pipeline of “appropriately sized and relatively low-risk opportunities”, Purcell reckons.

Meanwhile, the directors expect the current trading year to be less challenging but they are remaining vigilant.

My assumption is this business is on a long-term growth trajectory now. But progress could be slower than we’ve seen recently. City analysts have pencilled in an increase in normalised earnings of about 13% for this year and 8% next.

However, those potential advances are short of the double- and triple-digit percentage gains seen lately.

Nevertheless, when set against those estimates, the forward-looking earnings multiple looks undemanding at around eight. On balance, and despite the risks, I think this stock is worth further research now with a view to considering the stock for a long-term investment.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

US Stock

The Nvidia share price falls! Here’s what I think happens next for the S&P 500

Jon Smith reviews the overnight results from Nvidia and explains why this could stall the S&P 500 performance through to…

Read more »

Investing Articles

Down 15% today, is this FTSE 100 share too cheap for me to miss?

JD Sports' share price has tanked after the FTSE 100 share released another profit warning. Is this the opportunity I've…

Read more »

Investing Articles

Up 8% today, is this FTSE 100 growth stock a slam-dunk buy for me?

Halma's share price is soaring thanks to another headline-grabbing trading update. Is the FTSE 100 stock now too good for…

Read more »

Investing Articles

With a P/E ratio of just 10.5 is now a brilliant time to buy a cut-price FTSE 250 tracker?

Harvey Jones says a recent dip in the FTSE 250 leaves the index trading at bargain levels. One stock in…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

To build a passive income flow, I’d follow this Warren Buffett approach

Warren Buffett has set up passive income streams most people can only dream about. Our writer sees some practical lessons…

Read more »

Growth Shares

As the boohoo share price falls, could it become a penny stock in 2025?

Jon Smith outlines some of the recent problems involving the boohoo share price and considers if things could get even…

Read more »

Young Asian woman with head in hands at her desk
Investing Articles

Here are the worst-performing FTSE 100 shares over the last 5 years

These five FTSE 100 shares have been complete duds over the last half decade. But is there potential for a…

Read more »

Investing Articles

Nvidia stock has tripled this year! Can it keep rising?

Nvidia's latest sales update showed strong growth and the stock's been on a tear so far in 2024. So is…

Read more »