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Despite this gain, this group remains significantly unrecognised by the UK stock market, according to new research published today by leading business and financial adviser Grant Thornton.

For the past six years, the Top 50 Hidden Gems have outperformed the FTSE All Share market by 6.7 per cent.

Grant Thornton's 2007/08 “Hidden Gems Index” (HGI), the seventh annual ranking of companies whose cash flow growth is not reflected by their share price, highlights a ‘glass ceiling’ where companies are unable to achieve their full stock market value because of their relative size, sector or liquidity.

Bumpy economic conditions 

David Maxwell, a partner at Grant Thornton, says that in the current business climate where the credit crunch has well and truly made its grip felt, strong cash flow business might be best equipped to withstand bumpy economic conditions ahead.

He adds that this is perhaps triggered by a further contraction in lending or manifested by a downward correction in business volumes and values.

Looking at the stock market falls experienced over the past month, the FTSE All Share fell by 8.8 per cent, the “qualifying” group of 245 companies by 8.1 per cent but The Top 50 fell by only 5.8 per cent underpinning Grant Thornton’s view that cash generation provides a defensive quality to share prices.

It is instructive that over 30 per cent of the Top 50 have appreciated over this period while less than half of the companies within the Top 50 have fallen by a greater amount than the FTSE All Share Index.

The Index’s out performance continues a trend apparent since the inception of the Hidden Gems analysis in 2001. In each of the years since that time, the Top 50 companies have consistently outperformed the market.

Price per cash flow per share

Grant Thornton's analysis is based on all the companies within the FTSE All Share Index.

It excludes financial companies (banking, insurance and related) which generate cash in a different fashion from non-financial businesses, companies with less than four years of historic cash flow per share data and all companies with negative cash flow and negative cash flow growth.

This analysis yielded 245 companies 'available' for the analysis, the second lowest figure since 2003 (the base year for establishing cash flow growth), compared with 258 in 2006, 288 in 2005, 234 in 2004 and 251 in 2003.

The analysis is based on an assessment of up to seven years historic and forecast performance of companies showing good cash flow growth. 

This is then compared to a “price to cash flow per share” ratio which is derived by dividing the share price by the average for forecast cash flow per share.

The resultant figure, produced by dividing the cash flow per share growth by the price to cash flow per share ratio, is characterised as the Hidden Gems Index number.

Not adequate rewarded by the equity market 

While, viewed on its own, such a number is not meaningful, placed in the context of both the sector and the qualifying group, the resultant ranking highlights which companies’ cash flow per share growth is not adequately rewarded by the equity market, i.e. which companies are “Hidden Gems”.

Further analysis of the 245 cash generative companies highlighted that the 'available' group of companies includes 57 listed within the FTSE 100, up from 51 in 2006 and only 45 companies within the FTSE 250.

Unlike previous years, the index shows a greater balance between “large caps” – as defined as those within the FTSE 100 and FTSE 250 – and the remainder of the market.

One in five companies listed on the All Share Index reported, and is expected to report, cash flow per share lower than that in 2003. Only 18 companies which appeared in the Hidden Gems Index in 2006 re-appear in 2007/08.

There are 4 FTSE 100 companies within the 2007/08 Top 50 compared with 10 in 2006 and just 5 in 2005. The average market capitalisation for the 2007/08 Top 50 is £1.2bn compared to £3.0bn in 2006 and £1.3bn in 2005.

2007/08 Top 50 Hidden Gems show an average rate of cash flow per share growth of 645 per cent compared to 620 per cent in 2006 and 183 per cent in 2005.

The cash flow per share growth within the Top 50 is almost 3.5 times that of the qualifying group which shows an average figure of 199 per cent.

On an average price to cash flow per share rating, the 2007/08 Top 50 shows a multiple of 7.4x (12.7x for the whole market) compared with 11.1x in 2006 and 8.9x in 2005.