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This top small cap is walloping its larger rival Capita plc

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These were supposed to be the glory years for outsourcing firms, as austerity measures led local governments to turn to outside help for every available task their depleted budgets couldn’t handle. Instead, the likes of Capita (LSE: CPI) has found itself weighed down by loss-making contracts, profits warnings and a share price that has dropped over 50% in the past year.

Hope on the horizon

The loss of investor confidence isn’t without reason. The company’s operating profits sunk 28% lower year-on-year in 2016 and warned that it didn’t expect a return to profit growth until 2018. The cratering share price also meant relegation from the FTSE 100 and unsurprisingly led to three year CEO Andy Parker being forced out of the job.

The incoming chief will inherit a business that is currently being slimmed down and reorganised. This is a much-needed step for such a sprawling company that tackles everything from collecting BBC TV license fees to mortgage application processing for the Co-operative Bank. Asset sales will also be needed as the company had £1.7bn in net debt at year end, which was a worrying 2.89 times EBITDA.

There is hope on the horizon, though. The group order backlog at year end was stable year-on-year at £3.8bn. The catastrophe that was 2016 will also allow the new CEO to make tough decision about which parts of the business to sell and which to keep. A more focused Capita that concentrates on the high margin private sector white collar work for which it made its name could be an attractive investment.

Although the company’s share may look a bargain at 9.4 times forward earnings I’d hold off making any share purchases until the new CEO can fully explain the company’s new route forward.

A stellar small cap

At the opposite end of the spectrum is relatively tiny staffing firm Impellam (LSE: IPEL). Where larger rivals have floundered shares of the company have returned over 110% in the past five years thanks to a narrowly-focused business model and a series of wise acquisitions.

Impellam’s core business is staffing higher end jobs such as doctors, lawyers and accountants on short term or permanent contracts. This has proven popular with clients and over the past five years the group’s sales have risen over 75%, to £2.1bn annually.

Much of this growth has come through acquisitions and on this front there is very good news. The company’s latest big purchases have extended the group’s reach into major markets such as Australia and the US. And these purchases are showing results already as revenue grew 20.4% year-on-year and a focus on profitability improved EBITDA margins by 21.1% over the same period.

Impellam also has the firepower to continue buying up smaller competitors thanks to a healthy balance sheet where net debt was down to 1.36 times EBITDA. With its shares trading at a very cheap 6.6 times forward earnings I’ll definitely be following this stellar small cap closely in the coming quarters.

If you're not interested in staffing companies but are looking for a stock with plenty of growth potential I'd recommend reading the Motley Fool's free report on its Top Small Cap of 2017. This founder-led company has increased earnings by double-digits each of the past four years and its stock has matched this performance by increasing over 175% in value during that time.

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Ian Pierce has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.