Almost as unpredictable as the Melbourne Cup winner is Australia's small-cap equity sector. Picking a winner from this (mine) field is not easy due to the abundance of lousy runners unlikely to ever deliver a return on your investment.
The compensation for taking on the additional risk at the minefield end of the market is the eye-watering returns if you do back a winner.
As with the horses, the commonest way to do this is by studying the form.
In the small-cap equity space you'll need a four-legged company with a good track record of growing revenues and cash flows to suggest there's profitable times ahead.
You'll also need a business with a strong enough balance sheet to mean it won't require you to tip in more capital via equity raisings that often lead to a stalled (or reversing) share price.
Finally, you must look forward to imagine a business that could grow strongly for 3-5 years, while boasting good economics, or scalability, that enable it to grow revenues far quicker than costs.
It's easier said than done, but for anyone looking to take a high-risk opportunity today aerial-mapping business Nearmap Ltd (ASX: NEA) ticks the boxes.
It sells its aerial imagery on a software-as-a-service (SaaS) basis to local or national government agencies, construction businesses, the solar industry, surveyors, or insurance businesses, among others.
The functionality of the high-resolution maps helps their enterprise users save time and money on site visits for example and the company's Australian business grew revenues 22% to $36.3 million in FY 2017 to produce $21.8 million in free cash flow.
That's impressive and shows the high profit margins its SaaS business model can generate on a recurring revenue basis, although much of the free cash flow in Australia is being eaten up by the nascent North American business it's betting the stables on.
Over FY 2017 Nearmap's U.S. business chewed-up free cash flows of $14.5 million, with cash receipts of $6.2 million.
In other words the U.S. expansion is high risk, but if Nearmap pulls it off to turn profitable the share price could head multiples above today's price of 67 cents.
Importantly, Nearmap is well funded with no debt and cash in hand of $28.4 million as at June 30 2017, which means it should grow profits without the need for additional capital.
All eyes are on its next trading update likely on November 16, when the company holds its AGM.
Given the fast-changing technologies around aerial-mapping it's a high-risk investment, but if Nearmap's able to maintain its competitive position it could prove a big winner for today's investors.
