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Forget the National Lottery! I’d Invest in this fast-growing small-cap share

The chances of winning the National Lottery are very small and the chance of losing all the money you ‘invest’ in lottery tickets is very large. So, I’d rather take my chances by investing in a fast-growing small-cap company on the stock market, such as Keystone Law (LSE: KEY).

The firm is a profitable and cash-generative “challenger” aiming to disrupt the established law industry “mid-market.” And, by disrupt, I mean Keystone aims to win the business away from stodgy old established law companies. It’s been going since 2002 and has been listed on the stock market since November 2017.

Rapid scalability

I like the fact Keystone is relatively new to the stock market. Often that’s a good time to latch onto growth companies because they tend to arrive well-capitalised, with management teams fired up and determined to make their mark, and with plenty of room to grow because of their small size.

The directors reckon the business model enables “rapid scalability.” I like the sound of that because the company is increasing its stable of revenue-generating lawyers more quickly than the traditional model.”

Keystone’s lawyers work from their own offices with support from the central office team. Rather than fixed pay, remuneration is tied to the amount of income they generate for the firm, and they’re free to focus on business development and the delivery of legal work.

It seems to me Keystone has turned its lawyers into incentivised, law-practising salespeople, which strikes me as being great for the firm’s growth prospects. And today’s half-year results report contains some decent trading figures.

Revenue rose just over 15% compared to the equivalent period last year, and earnings per share moved around 14.5% higher. The directors signalled their satisfaction with the outcome and enthusiasm about the outlook by pushing up the interim dividend by 28%, to 3.2p. But the icing on the cake is their declaration of a special dividend on top, worth 8p.

Cash-generating and debt-free

To put those dividends in perspective, at the current share price near 510p, the ordinary dividend yield for the current trading year to January 2020 sits at about 1.9%. If you add on the special dividend, it’s around 3.5% but, of course, there’s no guarantee other special dividends will arrive in the years ahead.

Nevertheless, Keystone is proving its cash-generating credentials, and I think it’s quite rare for fast-growing firms to be as generous as this with dividend payments to shareholders.

I reckon the company’s debt-free status helps it to pay decent dividends. But with the forward-looking earnings multiple for the trading year to January 2021 running at almost 31, the shares aren’t cheap. Meanwhile, City analysts following the firm expect earnings to grow by percentages measured in the mid-to-high teens this year and next.        

The expansion programme is on track and working, and the outlook is positive. I’m tempted by the shares and would likely be inclined to take the high valuation on the chin, considering it a mark of quality.

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Kevin Godbold has no position in any share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.