In the latest episode, I sit down with Richard Hemming from Under the Radar Report to navigate the high-potential but risky world of small cap stocks. If you’re excited about finding under-the-radar companies with big growth potential, this episode is for you!

Richard is all about small caps and highlights the huge opportunities these overlooked stocks can offer. With few analysts covering them, small caps let investors uncover hidden gems that bigger players might miss.

We explore “operating leverage,” which Richard breaks down as the ability of small companies to ramp up profits by growing revenue without skyrocketing costs. This “profit ratchet” is why small caps are so exciting for those aiming for big returns.

Richard also introduces his unique strategy of taking “three bites of the cherry” with small caps. Unlike institutional investors, everyday investors can get in early and benefit across a company’s growth stages. He shares how companies like Gen Track have taken off thanks to their innovative software, serving as great examples of what’s possible.

For anyone new to small cap investing, Richard provides tips on assessing financial strength, emphasizing the importance of checking balance sheets, cash flow, and profitability to spot companies with real potential. And of course, he underscores the value of diversification to help manage risk.

Throughout our conversation, Richard brings in stories from his experience—from AI Media’s groundbreaking tech to Austal’s strong shipbuilding position. This episode offers a fresh look at the dynamic world of small caps, with insights that can guide you on your investing journey.

TRANSCRIPT FOLLOWS AFTER THIS BRIEF MESSAGE

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EPISODE TRANSCRIPT

Chloe: Shares for Beginners. Phil Muscatello and FinPods are authorised reps of MoneySherpa. The information in this podcast is general in nature and doesn't take into account your personal situation.

Richard Hemming: I would say with a small cap focused portfolio, Phil, you're looking at with these quality companies, as I called them. You know, big companies that are small caps like Austal, Nick Scali, even New Zealand media, you know, these are uh, companies that dominate in their markets. They're not the biggest markets in the world, but they are big enough for their domination to be material.

Phil: G'day and welcome back to Shares for Beginners. I'm Phil Muscatello. How long is the journey from small cap to mid cap and beyond? How can you take three bites of the cherry to make big returns? I'm joined today to discuss this small to mid cap voyage with Captain Richard Hemming from the under the Radar Report. G'day Richard.

Richard Hemming: Hi Phil. Ahoy, ahoy. Welcome to the good ship under the Radar. It's great to be sailing ahead. Sailing.

Phil: Welcome aboard because actually I want to.

Richard Hemming: Talk about some ship ships today. So it's going to be fun. We're going to have a lot of fun.

Phil: That's right. I noticed there is an Australian shipping manufacturing company I believe, coming up to talk about later on.

Richard Hemming: Well, we can talk about whatever you want because there's so much to talk about in small caps, honestly. I know it's diverse.

Phil: It is. It's so diverse. There's so many things happening.

Richard Hemming: It's never boring.

Phil: It's never boring.

Richard Hemming: It's never boring. It's the most interesting kind of segment of the market.

Phil: M so you were basing this interview on a presentation you made at a recent conference. Tell us about that conference.

Richard Hemming: Well, I've been going to the conference for a few years and I must say this was a particularly good year because there was lots of new blood. So there was loads more data points for me and my team to look at, you know, exciting new stocks. A couple that stood out. Bubs was interesting raise investor fintech. I hosted a couple all tech batteries that have some innovative battery technologies. Hazer Group, which I own personally, they do hydrogen. They're an innovative company with a, uh, technology that, you know, turns waste into hydrogen. So it doesn't get more exciting than that. You know, there was intelligent monitoring group, the numbers are looking good there, some medtechs. So there were loads of companies for me to go back with my team to look at. So more companies for us to assess to, you know, take under the radar, which is the aim of all small.

Phil: Cap companies and what it's all about. Oh, uh, that's interesting. Had a couple of the CEOs and CTOs on the podcast. Podcast? Actually, I've had someone from. Ha. I can't remember his name. Andrew. Andrew Cono, I think, was the Chief Technical Officer.

Richard Hemming: Canejo. Yeah, he. Yeah, he was one of the founders. Um, yeah, I spoke that the guy was Corey Glenn Corey, I think, don't quote me on that, but he's the CEO, the guy that I met and interviewed. Yep.

Phil: Yeah. Okay. And of course, we've had Brendan Malone on as well, from Raise Invest.

Richard Hemming: Yeah. Well, that's an interesting story.

Phil: It is.

Richard Hemming: Sort of learning more about that story. Yep.

Phil: Okay, so let's go back to the basics. Why small caps? Why are you so interested in them? What gets you excited about them?

Richard Hemming: Oh, uh, well, why not? I mean, what's not to get excited about? Whenever something isn't mainstream, I get excited because there are opportunities that just aren't known about, aren't available. It's very much into that sort of Captain Kirk Starship Enterprise world, where you're looking at a world that's not really as well known. And therefore, by definition, there's going to be more opportunities. Often, uh, I'm the only one talking to these companies. There's not a bank of analysts on the call, it's just me. So it's really good when you've got opportunities that aren't well known and you can certainly bring them to the world and, dare I say, profit from it.

Phil: And so diversification is one of the angles that brings in here. Because if you're looking at the ASX 200, it's not particularly diverse, diversified in world kind of terms. But you can access this through small caps, is that correct?

Richard Hemming: Well, I mean, we've got a very. Even by global standards, our market's very concentrated. And I get with the market trading at record levels, what you really want to do is look at other stocks that you can have to diversify your risk and like that's how you reduce your risk is by owning companies that have different sort of sorts of risk. So the sum total reduces what they call systemic risk. But the. Then of course, you have the idiosyncratic risk. So every company has its own risks, but if you own a number of them, like I would say 14 plus, you can reduce the risk, the overall risk of your portfolio. That's been one of the big innovations of finance in the past sort of four decades.

Phil: So one of the notes I made here was operating leverage. And I haven't even got a question be that because I'm not sure exactly what you meant. But what do you mean by operating leverage and what

00:05:00

Phil: it means in the small cap space?

Richard Hemming: Well, luckily for you, Phil, it's not complicated. It's quite a simple.

Phil: I like it when it's simple.

Richard Hemming: No, it is a simple concept because every company has costs and some are fixed and some are variable. Um, with operating leverage, when you increase your revenues, you're doing it off a relatively fixed cost base. So those revenues are coming down to the bottom line. So basically with small caps, you've got a smaller, uh, cost base, so your profits are magnified and it goes the other way. But what it means is that you can really ratchet up profit growth, which is what really drives value for investors. And a classic example was a stock called Gen Track that we picked a couple of years ago and, you know, has gone up more than tenfold in time. So, okay, operating leverage can go the other way, but the key takeout is your returns are unlimited, whereas your losses are limited by the amount you invest. So that is the secret to having, uh, a, uh, portfolio of small caps.

Phil: So what do you mean by three bites of the cherry?

Richard Hemming: I love using that expression, three bites of the cherry. Because it really does have some advantage over the institution because an individual investor can get in right at the ground level where institutions can't, you know, because they can't get the stock, the risks might be slightly too high and they can benefit right through the life cycle of a company. So they can really, uh, use the great weapon of investing, which is patience, to make super returns. So, like say, take the Gen Track example that I talked about before when we first covered it. Gentrack's basically a software utilities company. They also have and AIRPORT services software, but their core business is software utilities. So they do billing software for utilities and they really benefited initially. They have a cloud type software, you know, so they're relying on APIs and, you know, plugin. So all these new utilities that sprung up in the uk, they were able to use Gen Track's technology because it was low cost, it was cloud based software. But then suddenly the situation changed when wholesale electricity prices started ramping up. So a lot of that customer base, they were going broke. So then gentrack itself was going broke because their customers were falling like flies. So we looked at the company and thought, well, we think there's a good chance this business is going to make it through this period. So the first bite of the cherry, a, uh, survival boost. So you get that boost where the market breathes a, uh, collective sigh of relief, the company's going to survive. Then the second bite of the cherry is when they start producing profit growth, so they start producing consistent profit growth, which investors are always really, really impressed by. So the big institutions start nibbling away, start looking at the company and so, and they buy it. And then what you're getting is the benefit from that profit growth and the benefit from a multiple expansion, because the big end of town is starting to rate the stock more highly, so it trades on a bigger multiple. Then after that only happened last month, I think with Gen Track, if this kind of trend keeps going, it gets airlifted into the ASX 300, the S&P ASX 300. So a key benchmark index where your index linked ETFs are forced to buy the stock. So you have this virtual circle that small caps really can sort of go from being a micro cap to a small cap to a mid cap, and then potentially, you know, who knows, a big cap, a blue chip. So that's the pathway we're talking about here.

Phil: So how do you review the fundamentals of a company? I mean, obviously, you know, everyone would like to get in on the ground floor with a company like this, but what was the screening process that you went through to identify the opportunities?

Richard Hemming: Well, often where you start is the financial strength of a company. So we have a risk rating of 1 to 5, so, 5 being highest risk, 1 being lowest risk. And what you're looking for is a balance sheet. You're looking for cash flow and you're looking at profitability and there's a thousand metrics in between. But basically what you're trying to work out is a company that's not necessarily going to need to raise money and has a pathway to profitability, if indeed is profitable to start with. So you're sorting out companies in terms of quality. What you're also doing is assessing valuation. So that's where you get to multiples. You know, if they don't produce earnings, you're looking at sales multiples or you're looking at simplified discounted cash flow. So what are prospective cash flows and what are they discounted

00:10:00

Richard Hemming: in today's value? Then you come up with the valuation by dividing that valuation by the number of shares.

Phil: Wow. I'll just be a bit controversial here because our last guest last week, Andrea Brown, doesn't like DCF at all as a measure.

Richard Hemming: Well, I think investing comes back to what you're paying today for future prospects tomorrow. So yeah, I mean, basically that's where other valuation methodology are. A, uh, proxy for dcf. But DCF does have some serious weaknesses if you just rely on dcf, because the valuation you can get on a DCF can be vastly inflated by a couple of sensitive kind of variables. So I can see where Andrew's coming from there. But some of these companies, you need to do some sort of valuation on them. And I'm saying, okay, the more you need to rely on a dcf, the less you've got to hold on to.

Phil: So in the investing world there's always the categorization between growth and value. Why do you think it's important to identify this kind of measure and what's the difference between the two?

Richard Hemming: Oh, uh, well, I think it just. Everyone wants to categorize stuff because then you can make sense of complicated world and you can put in your mind a company and you can understand more what you want out of that company. Like are you investing for the big potential or are you investing for the income from the dividends? So that's simply, I guess, simply put, that's why I like categorizing things in that way. We have other categories, like we're looking at special situations where they might have a business that's loss making if you get rid of that business. So breakup scenarios. But put simply, how I like to categorize my portfolio, ah, is into value situations where I'm getting a discount for the value that's on offer. And these are companies that often, I know quite well and I like to think of them often as a big company in a small cap. So I'm paying small cap prices for what I think is a really good business, a quality business. Other times I look at where I invest less. Uh, money is where there's potential, there's growth potential. So there's higher risk and I'm not throwing as much capital at it, Phil, but there's a lot more. You know, I own a few of these companies and those are the sorts of companies that can make a big difference in valuation terms.

Phil: So, Richard, I think the disruption factor comes into play in this, in this area as well sometimes. Yeah. How do you assess the disruption factor? Because that can be so hard to work out if something's going to be disruptive or is just a brief story in a teacup.

Richard Hemming: Well, yeah, as if, you know, as if you really know what's going on in the future. All you can assess is what's happening to today. Which goes back to your irons in the fire. So basically, disruption means you're taking market share at a really high rate. Sometimes it means you've got a technology that renders other technologies obsolete. AI Meaty is a classic case where we saw disruption potential. But on the other hand, we saw a company that was mired in kind of really, I guess, serious labor issues. Because, you know, sure, they're called AI Media, they do captioning, Phil, but their costs equated to 65% of their sales, which is extremely high. So although they had this AI technology, they were paying a lot of people to do the captioning. So you thought, well, I want to see the evidence. And then what happened was if you believed in the technology that started being validated when. Well, firstly the technology started proving itself, started proving the accuracy of their Lexi AI based technology could produce as good, if not better results than humans. And then secondly, you saw more and more of the proportion of their sales going to Lexi versus going to their human captioning services. So you started seeing evidence. And when you start seeing evidence, people jump on at varying rates, don't they? It's like suddenly everyone's biting. So at the start you have to be a sort of believer in some of these sort of concepts. But then you can leverage into it as you see the fruits of their endeavors being delivered. Like, there were lots of companies at the start of BNPL that were doing all sorts of innovative fintech things. But afterpay just sort of managed to capture market share and you started believing that. You start seeing the sales line validate your investment thesis and then you leverage into that. You might invest a bit more. But you want to really limit your investments to the start because as you said before, as if you're going to know something's really disruptive from the get go. What

00:15:00

Richard Hemming: you do is you use your common sense to think, well, okay, I believe that there's something here, but I'm not going to throw the, I'm not going to invest the kind of money in this that I would in a quality company. Those ones that I mentioned before.

Phil: So AI Media, is that the name of the company?

Richard Hemming: Yep.

Phil: And uh, they do captioning. So like the captioning that you see on all the streaming services, is that correct?

Richard Hemming: They do captioning. What they've done is on a lot of broadcasters use it like live sport use it, I think. So competitive edge is they can do live captioning. So, you know, because a lot of captioning is quite easy when it's being replayed or something like that. But when it's live it's a lot more impressive and they've got the ability to do that. And broadcasters who are, uh, I guess, you know, broadcasting is a very difficult business. It's very competitive and in sort of to some degree structural decline to those streaming businesses. Well, broadcasters, you think, well I can get this service at an eighth of the cost or a sixth of a cost or whatever the, I can't remember the exact percentage, but a small percentage of the cost. Well it's a no brainer for them. They need it, they need it to survive. So that's when you're in a sweet spot as a small cap, is when the big end of town really needs what you have and has to pay for it. And that's where you get that kind of benefit. When it's a no brainer for people, for institutions to use your technology.

Phil: So when you've found a quality company, how can you identify whether it's trading at a discount?

Richard Hemming: Well, sometimes when you've got these quality companies, they can be more easily valued because they're sort of similar to bonds. So you're seeing an income stream. You're able to value the income stream and you're able to see, okay, when are they going to get better than average profits or how do their profits sit within the context of their history. And sometimes with these quality companies, like one that I've talked about recently, Austal, like that's one of my core companies in my portfolio. Well this company, like we value it at around three to four dollars and over time and when it trades at two dollars, it's got a market capitalization of 700 million. So we think it's really good value. But when it does get to those kind of levels, well, sentiment's really up against it because it's a very cyclical business. Like these are uh, huge contracts. Like they build ships and they're going to build submarines. For the biggest customer in the world, the US Government, the US Navy, certainly the biggest customer for a shipbuilder in the world, Phil. So you're looking at when it's $2, it's valued at $700 million. And this is a company that has an order book of $14 billion, employs 5,000 people, has eight service centers, four shipyards. So it's a big company by any stretch of the imagination. But it's a small cap at ah, 700 million. That wouldn't even get into the Russell 2000 small cap index. Why is that because it's got such big capital requirements, it takes a lot of resources to get these shipyards going, to keep them going. And it's very cyclical. So when it's, you know, they're burning, they've got costs that a, uh, labor force that burns a hole in their pockets when they're not in contract. So there is risk, but against that you've got huge barriers to entry. So then it just comes back to experience for a lot of these quality companies, like knowing over time where you assess value.

Phil: And, um, one of the aspects of Austal is a barrier to entry is the very rigorous security measures that are in place that you need if you're going to be working for the US Navy, for example.

Richard Hemming: Oh, not everyone. Yeah, that's what we were saying, barriers to entry. So they've got huge barriers to entry, but they've also got great uncertainty. I think there was an attempt at takeover. But you sort of believe that with a company like this, someone will take it over eventually.

Phil: Yeah, there was a South. South Korean. They were a South Korean company, wasn't it?

Richard Hemming: Yeah, that's it, yeah, yeah. And combined with private equity, I think. Yep, uh, exactly. You just think with a company this good, it's going to fit somewhere. So you kind of have that underlying value, don't you, where you think, well, if it does fall on bad times, it's almost too big to fail because the US government doesn't want it to fail. They can't afford for key suppliers to fail, can they? So it does tick a lot of boxes. But, you know, like all these stocks, it's sentiment ebbs and flows, doesn't it? It's not always really positive. And it's positive now because they got some good news on the Aukus front. And the US government really is putting its money behind some of the infrastructure, or I think a joint contract is putting them, like. I just can't recall the details off the top of my head. But someone's reducing the capital costs for Austal, a co contractor, so that, you know, for some of the big

00:20:00

Richard Hemming: infrastructure that they have to deliver. So that really does boost your return on equity.

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Phil: You like to know, um, what the role is of each stock in your portfolio. And you've said that Austal is One of your major roles, what part does it play in your portfolio and what are the other roles that you like companies to play there?

Richard Hemming: Well, I would say with a small cap focused portfolio, Phil, you're looking at with these quality companies, like as I called them, you know, big companies that are, uh, small caps, like Austal, Nick Scali, even New Zealand Media, you know, these are companies that dominate in their markets. They're not the biggest markets in the world, but they are big enough for their domination to be material. I would hold 10 to 12% sort of 12% max of these sort of companies. With the other companies that I look at that are, uh, higher risk growth type companies, I would hold sort of 1 to 2%, 2% max. So with Gen Track, for example, uh, you know, I would have bought that would be like 1% of my portfolio. Then over time, with those sort of growthier companies that are higher risk, like, I wasn't quite so confident. I actually took my costs out and let my profits run. So then I might think, well, you know, that's why when a market falls or when there's weakness in the overall market, sometimes that provides an opportunity to buy those sort of companies that you view as quality to, uh, top up your holdings. But you're taking risk off the table on some of those stocks as well. When you've taken your costs out, when you've taken some of those profits on the way up. Taking profits is a good way to ensure that that competition for your Premier League team. I mean, I'm not going to say, you know, Arsenal's going to win anymore, but, you know, certainly when Odegaard comes back, he will boost their back line, boost their midfield. And that's what you're trying to do in your portfolio. You're trying to boost your midfield when there is weakness. So you're trying to boost the quality stocks. And I'm sure not everyone will be an Arsenal fan out there, but what you can do is boost your portfolio with those quality stocks and also take profit on the riskier stocks as they go up. So that's my common sense strategies for investing. In a nutshell, Phil, I love it.

Phil: But I also love that term growthier. Some of your growthier stocks, I mean, is that in all the finance encyclopedias?

Richard Hemming: Yeah, I don't know, I'm just sort of making like the three bites of cherry. That's me. M like you're getting pure Richard Heming here, Phil. I'm not trying to unadulterate, I'm not trying to give you anything You've heard before.

Phil: But it's interesting with that growth here stuff, because if you've got a company, it is interesting. It is, because often that's one of the psychological things that people have is that they miss out or they sell too early on one of these stocks. And that's one of the ones. Well, this is the kind of part of investing where you really need to know yourself and how to keep your emotions under control because you really want those huge returns.

Richard Hemming: Everyone wants the huge returns. But I mean, that's without question, that's what everyone wants. I mean, that's the point of, uh, trying to go for what they call the risk assets. But what I would encourage people to do is to use the discipline of taking profits as well. And, and then you just see how they go, how these companies go, and then you leverage into success. And it's always good playing with house Money. Phil. You know, I took profits too early in gen track, but I didn't leave the field. I still owned it. And so when they got some results, I got more confidence in the underlying story and I bought some more at a higher price. It's just like life is never static, but you want to feel like you're taking risk off the table. And there'll always be an opportunity tomorrow. I'm telling you, there always are, uh, opportunities in the small cap realm especially.

Phil: So tell us about the other companies that you covered in your presentation.

Richard Hemming: Well, there's a couple that I covered just at the high risk end. I covered the AI Media and I contrasted AI Media to Beamtree, which is another software company. And Beamtree are an interesting company because they provide sort of data analytics for health for, for hospitals. So everyone knows how important E Health is now. And there's tremendous demand for their different suite of software products. And they've got a lot of confidence. Like basically they're making about 25 million in recurring revenues. And you know, you're getting big margins on those recurring revenues and they compound over time. But then their forecast

00:25:00

Richard Hemming: of something like 60 million by FY26, so in a couple of years. But there's also the risk factors. One of those risks is that I've owned a lot of medtech stocks in the past and hospitals in the healthcare space in general, they take a long time to make decisions. Or hospitals, the sales lead time can be longer than you would like or than investors sort of anticipate when they get all hyped up about a company. So that's one factor. Another factor is that the CEO just Left. So I immediately thought, well, okay, you've got these huge ambitions, but then the key guy who's going to deliver on that walks out the door. So I'm saying, well, I was a buyer and then I quickly downgraded it to hold, to wait and see. It's one thing to have a lot of demand, it's another thing to actually see that come to fruition. Like with AI Media, what we saw was there was a lot of demand, but then the technology met the expectations and the buyers were in a position to strike while the iron was hot, to strike straight away. So, you know, one thing we do look at with a lot of these companies is the customer risk. Customers are so important for, um, obvious.

Phil: Reasons, they can't see the equation, aren't they?

Richard Hemming: Yeah, well, you got it. That's where if you're going to do your analysis, that's a good place to start. Outside of just doing your simple financial analysis, you need to be looking at the depth of the customers, the type of customers. You know, like I said before about gentrack, they had this great business but then their customers started going broke. So then, okay, is this an existential crisis or can they survive? That's when it comes back to base case scenario. A couple of other stocks I mentioned, Hanson Technologies and I compared that one to gentrack. So a lot of time I spent comparing contrasting. Hanson also have utility software, billing software for utilities, but they're more focused than Gen Track. They've been around for longer, they're founder led, they've got deeper customers. But some of the big utilities in the world, but it's an on premise solution as opposed to a cloud based solution. So there's a lot more capital involved in implementing their solution. They're a lot more embedded, but it's hard for them to grow at the same rate. And what they've done to try and rectify that is bought a company called Power Cloud, an Austrian company. They're sacrificing a couple of years of growth to integrate Power Cloud. So it's difficult, it's always difficult. Like the real world, these managers, they work very hard and it's very difficult to do something that the market just takes into account instantaneously. The market works straight away, within seconds, if not even faster than that. Whereas the real world takes a lot of time to do things like, you know, integrating. A company should never be underestimated. Like Wesfarmers, they must have spent at least a billion dollars in cash trying to get a Bunnings equivalent in The UK called home base and now it's a complete disaster. I mean the corporate world, big and small is littered with disasters with small caps. You haven't got as much fat to play with so you can't afford a home based disaster. So you've got to do your homework and that's why you own a few of them. But within that kind of problematic sort of difficulty of trying to do things in the real world, there's opportunities for investors to take advantage, like because the pendulum is swung too far the other way, there's too much negativity in the share price. So gen track, there's a lot of optimism, but their growth starting to come off. You can't just keep growing at exponential rates forever. You know, there are fundamental laws of gravity that affect everyone. And on the other hand, Hanson Technologies has more potential to really grow from the power cloud, but that's been discounted because the growth has been more frustrating for them. So that's like a classic example of two companies in the same industry, but very different paths, very different valuations.

Phil: So they acquired Power Cloud, did they?

Richard Hemming: Yeah, a couple of years ago.

Phil: Yeah.

Richard Hemming: In an Austrian company. So it gives them access to the European market, gives them access to a cloud based technology, you know, so it complements them very well. But it's difficult to get all those synergies, both top line and bottom line cost synergies. It's just difficult to get them going as fast as a lot of investors would anticipate when they're all buoyed by something from the get go and then they start getting too despondent and that's where the opportunities can occur. It's classic contrarian investing.

Phil: So

00:30:00

Phil: how do you assess a company when it's getting to the stage that you think, uh, I'd better sell it. This is not working out. The thesis hasn' worked out. What are some of the things, what are some of the danger signs that you look for?

Richard Hemming: Well, what I do to start with, like I said, is take my costs out. And that's not necessarily a danger sign, that's just an investing discipline.

Phil: So as soon as you've made a profit in a particular company.

Richard Hemming: Oh, I wait for there to be a profit.

Phil: If there is a profit.

Richard Hemming: If there is a profit, you're doubling your money. So when a stock doing better than that, I start taking profits just to give myself peace of mind.

Phil: Yeah. Reassurance. Personal reassurance.

Richard Hemming: Yeah. Well then to, just to take some risk off the table. So then I've banked those profits Lots of small caps. Dividends aren't the biggest factor, but then, you know, who's to know when the optimal time is to sell? Like what I'm saying is give myself a peace of mind by saying I'm just going to take profits at this point when I've doubled my money, take the costs out and then whatever happens after that, I'll just see how the fundamentals dictate it. Sometimes when you do get concerned is when you can see a company is going to need Money. So the cash flow statement is the key. Like that's the blood of a company, cash flow. And um, you can see that a company's, they're not making money and their balance sheet does not look, is getting weaker and weaker. Like an example would be recently I looked at Playside Studios, which they're a gaming company and I'd factored in that they do games. So they get two sources of money, right? They get money from contracts, from work for hire. So people paying them to build games and to do whatever those gamers do, basically to build, do the graphics and do everything like that. But then they have their own iPad where they've developed games themselves and they can make money from the valuation uplift of those games. Like they make money from royalties of games that they've developed themselves. Various levels of royalties depending upon how much they own of the game. And what happened was a surprise recently when their contract work was like 50% of revenues. And then they say, oh, um, we're not getting more contract work that's winding down now. So, you know, we're going to eat into our cash. But the fact is that they had cash to eat into. So I was encouraged by that. There's 37 million in cash and so they can live to fight another day. But I was also surprised to know because we do a lot of work on contractors. Tilton, the um, mining guy, he works very hard on working out the order books that contractors have. And so it was a bit of a surprise to me to hear that they were running dry on that side. So then I thought, well, why did I buy this stock? You know, because it fell like 30% in a day or something like that. I bought it because I thought, well, these guys can really shoot the lights out with one of their games. So I still think that. But I know that they're eating into cash. So I'm not going to be buying more after the fall and I'll be looking for management to kind of resuscitate my view of them over, uh, Time to see that they can build up that work for hirebook so that they can get that income. I guess what I'm saying is okay, I'm still in the stock, but I'm not just because it's fallen, I'm not going to be buying more. But it gives you pause for thought when your investment thesis gets questioned. Like it's all about why did you buy the stock? Every day you look at the stock price or every week, or how often you review your portfolio, you think, why did I buy that stock? Well, I'm happy to hold onto that company because the reason I bought still exists. I'm just slightly less confident with the cash flow. When they built up their balance sheet to a point where they don't have to raise emergency capital, that's the worst case scenario for investors outside of a company going broke is when they raise emergency capital. So that's what you're trying to avoid.

Phil: So when you're looking at cash flow, which is the particular metric that you're looking at, like just raw revenue figures.

Richard Hemming: Often you look at their short term liability like on the balance sheet, you look at their cash and assets that they can sell quickly versus their short term liability. So how can they meet their short term obligations? And then on the cash flow it's simple. You've got your operating cash flow and then you look and see how much are they investing to build their business, to grow their business. So it's which then gets to you. So free cash flow. So over time, was their cash lower at the start of the period or higher? Is their cash lower or higher from the start of the period and why? So all you're trying to do is just answer those simple questions and then you're trying to look at, well, what's going to happen next time? Is this trend going to continuing? What are they

00:35:00

Richard Hemming: saying about the business? You know, if it's cyclical, if it's a commodity related business, how is the underlying commodity going? You're just trying to get a simple explanation for whether they can stay in business. The cash flow is about basically will they need to raise capital or not.

Phil: So Richard, remind us again about under the Radar report and how listeners can find out more about you guys.

Richard Hemming: Well, we're a research house and we do specialize in small caps, but we look at the whole investing path. So we're looking at trying to build up people's top tolerance for risk and understanding of risk so they can get those really big opportunities. You know, whether it's building wealth from scratch Whether it's getting the basic rundown on blue chips and then moving from there into the high powered, high octane, you know, no holds bar world that we on the good ship under the Radar Report love so much. So that's our website, under the Radar Report. And you know, it's all there.

Phil: Thank you for using my tortured analogy again. I love a tortured analogy.

Richard Hemming: I thought, yeah, I thought I'd had to go back to the ship.

Phil: That's right. Yeah, we needed the ship. But, uh, we also didn't really explore that tortured analogy of your Premier League team as well, as much as I'd hoped to.

Richard Hemming: Oh. Uh, I just thought there was limited. Yeah. Since Arsenal lost on the weekend, I've, you know, I found it a bit hard to. Found it a bit. They lost to Newcastle. I found it a bit hard to think about my Premier League team as usual.

Phil: There's always another week.

Richard Hemming: We live and die. There's always another weekend.

Phil: Richard Heming, thank you very much for joining me today.

Richard Hemming: Thanks for having me, Phil. Wonderful to be a part of your show.

Chloe: Uh, thanks for listening to Shares for Beginners. You can find more@sharesforbeginners.com if you enjoy listening, please take a moment to rate or review in your podcast player or tell a friend who might want to learn more about investing for their future.

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