Six turbo-charged small caps

Our screen is based on the criteria used by legendary US growth investor Martin Zweig, although it does not strictly adhere to his approach. The screen is primarily concerned with looking for a strong track record of earnings growth, although, where forecasts have been available we have factored in brokers’ predictions for the future. On top of that we've looked for valuations that are not overly aggressive or so low that they suggest an impending disaster.

As we're hunting in the small cap arena - constituents of the FTSE All-Small, FTSE Fledgling and the Aim All-Share - the risks are higher. We've therefore included a range of tests on key debt and solvency ratios to make sure companies picked out by our screen are well placed to survive any knocks. Here's the detail of what we've screened for.

Growth test

■ 5-year compound average EPS growth rate of 15 per cent or more.

■ Revenue growth of at least half EPS growth over 5 years – ultimately revenue growth drives long-term EPS growth.

■ EPS growth in each of the last three years and in at least four of the last five years.

■ EPS growth in each of the last two halves.

■ Forecast EPS growth, where forecasts are available.

Solvency test

■ Interest cover of 5 times or more.

■ Net debt to cash profits ratio less than 2.5 times

■ Current ratio (current assets/current liabilities) greater than 1.

Valuation test

A historic PE ratio above the lowest 30 per cent of all shares screened and below the highest 20 per cent.

Three of the six stocks that made it through our screen also featured in our recent screen for high-quality smaller companies. That screen looked for high rates of return on equity, which many regard as a key determinant of a company’s sustainable, self-financing growth rate, so this overlap should perhaps not come as too much of a surprise. Indeed, it helps strengthen the case for the stocks concerned – Brooks Macdonald, Nichols and James Halstead. The list below is ordered from lowest to highest forecast PEG ratio (forecast PE/forecast 1-yr EPS growth).

First Derivatives

Software and consultancy group First Derivatives touts itself as one of the fastest growing capital markets service providers in the world, and its track record supports the billing. Most of the Northern-Ireland based company’s revenues – 69 per cent in the first half – comes from consultancy activities, which involves sending staff on lengthy secondments to clients. The complexity of financial software systems and ever-increasing regulatory demands has helped fuel demand for its service driven model and should continue to in the future. The company has also developed its own software which is producing sales growth too. Last IC view: Buy, 480p, 28 May 2012

Source: S&P CapitalIQ

Zytronic

The move into touch-screen technology, which accounted for 70 per cent of first half sales, is what's behind the breakneck growth at glass and plastics specialist Zytronic. Even though the group is seeing weakness at some of its traditional operations, such as light diffusers and ballistic visors, the growth in higher-margin, touch-screen sales has pushed both revenues and profits up. Zytronic has a number of applications for its technology such as ATMs and tills, and new orders are coming in fast. The group also makes most of its sales overseas and has recently been benefiting from strong growth in both the Americas and Asia Pacific. Last IC view: Buy, 305p, 22 May 2012

Brooks MacDonald

Wealth management company Brooks MacDonald has set itself the target of achieving 20 per cent organic earnings growth for the foreseeable future. These are grand aims but the company's track record suggests it may well deliver. Growth has been driven by the popularity of SIPPs and the use of specialist wealth managers to decide on investments held within them, as well as a growing trend for IFAs to use third parties to make investment decisions. Brooks has also recently moved into managing its own funds and has built a cutting-edge back office, which is capable of taking on work from third parties. Last IC view: Hold, 1,345p,13 Mar 2012

James Fisher & Sons

Shares in James Fisher hit a four-year high after the marine services group announced a 21 per cent rise in underlying pre-tax profits in half-year results which were ahead of both management's and analysts' high expectations. Chief executive Nick Henry said the business would continue to expand into higher growth markets in Africa and Asia, and combined with a resurgent North Sea oil market, this news prompted brokerage N+1 Brewin to upgrade pre-tax profits forecasts for each of the next three years by between 3 and 6 per cent. Analysts now forecast full-year pre-tax profits of £35m and EPS of 55.1p (2011: £30m and 48.4p), rising to £38m and 59p, in 2013. So with good overseas prospects, double digit dividend growth, and a persistently high oil price, a prospective PE ratio of 12 times looks too low. Last IC view: Buy, 665p, 21 Aug 2012

Nichols

Times have been tough recently for soft-drink makers due to dodgy weather and rising input costs. However, Nichols, the maker of Vimto, is showing few signs of the pain being experienced in the wider market. While recent trading in the UK has become more challenging, the company nevertheless continues to gain market share and stands to benefit from new marketing initiatives with Weight Watchers and Dragon's-Den star Levi Roots. What’s more, overseas sales continue to grow strongly. So prospects for 2012 look good. Last IC view: Buy, 693p, 26 Jul 2012

James Halstead

Vinyl flooring hardly sounds like the kind of activity you’d expect to generate long-term growth, especially in the current climate where refurbs and new-builds are increasingly rare. However, this is the industry which has earned James Halstead its exemplary long-term track record. The group's success is in no small part down to management's ability to find new niche markets to push its products into as well as new international markets to sell to. Indeed, two thirds of sales now come from overseas and prospects look good. Last IC view: Buy, 5855p, 1 Aug 2012