When I first meet a new company, I want to get an idea of what it does and how its doing financially. In the case of Epsilon Net, I found out that it was a software company and started by looking at the numbers. A few questions popped up, so I went hunting for information in their financials.

Let’s meet Greek software company, Epsilon Net.

Company information

Company background

Epsilon Net SA was founded in 1999 and provided specialised vocational training on financial issues. They later went on to combine training activity with information to address the needs of managers in the wider financial area.  By 2002, the company entered the software industry for the private sector.

Epsilon has three business units. The Software business unit provides integrated software applications to businesses and accountants. The main software lines are payroll, accounting and business software. The Network business unit operates an online publication of accounting, science and labour legislation. The Training business unit provides vocational training and seminars for businesses.

Financial performance

Epsilon has a healthy and growing return on capital employed (ROCE), which has been averaging 19.4% over the past five years. As a rule of thumb, ROCE of 15% is very good. Note that over the past three years, the performance has jumped up.

The businesses profit margins have been increasing steadily and most importantly the cash conversion is above 100%. This tells us that more than 100% of the net profit converts to cash. That is a good indicator that profit is not merely an opinion, but is actual money coming into the company.

Debt levels (51.4%) seems reasonable, while interest costs (3.5%) have been decreasing over time. All else being equal, the company would be able to pay off all debt from free cash flow in under three years (2.89 years). So debt seems okay.

Very importantly, free cash flow has been growing at an incredible average rate of 122% over the past few years and the share price has followed accordingly.

One notable concern is that the company has been issuing a lot of shares in recent years. The most recent financial statements indicate that these shares are being used for a share allocation plan for executives and staff. It seems like no matter where in the world you go, software companies award a lot of shares to employees, possibly to the detriment of shareholders.

Stock price performance

Epsilon has a market capitalisation of €650 million. That makes it a small or mid cap in Greece, where the largest company is worth about €11 billion.

As the 10-year share price graph shows, Epsilon’s stock has been going up steadily in line with operating performance. Here are the returns over time.

• 1-year: 17.65%

• 3-year: 62.11% per annum

• 5-year: 91.36% per annum

• 10-year: 70.65% per annum

That means Epsilon is up 210 times in 10 years. If you had invested €10 000 in Epsilon 10 years ago, you would now have €2.1 million.

By comparison:

• Nvidia has grown at 74% per annum for 10 years.

• Tesla has grown at 28% per annum for 10 years.

• Microsoft has grown at 27% per annum for 10 years.

• Amazon has grown at 26% per annum for 10 years.

• Apple has grown at 26% per annum for 10 years.

• Meta has grown at 21% per annum for 10 years.

• Google has grown at 19% per annum for 10 years.

In terms of valuation, Epsilon is trading at a PE of 35.2. This is high by any standard and is much higher than the 10-year average PE of 22.

Re-ratings are not unusual when a company’s financial performance improves. Over the past five years, Epsilon has changed from average returns to spectacular returns. The key point is that a PE of 35 might seem high historically, but it might be an acceptable valuation if the company can sustain its recent financial performance into the future.

Conclusion

Epsilon Net shows that there are gems to be found on stock exchanges around the world. It is also a reminder that we don’t only have to look at the big US tech giants for great returns.

When you find a new stock, especially in a market that you are not familiar with, it is important to take time and get to know it before investing. For that reason, I will add it to the ROA watchlist and keep an eye on it from time to time. I suggest you do the same before jumping in.

If you want to find out more about Epsilon Net, here is a link to their website. They have an investor section with financial statements and other details about the company. The website is available in both Greek and English.

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