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I am currently looking at penny stocks that could boost my portfolio returns. Although small-cap stocks often carry a higher risk of volatility than more established companies, with enough money on hand I’d like to allocate a modest percentage of my portfolio to higher growth opportunities.
One AIMThe listed stock that has caught my eye recently is Accrol group holdings (LSE:ACRL). This company manufactures toilet paper rolls, kitchen towels, and facial tissue products for major grocery retailers such as Tesco and Aldi. As I write, Accrol’s share price is below 32p.
Of course, it’s not the most exciting sector to invest in. But I think the potential gains on offer make this penny stock a more attractive investment prospect than it might appear at first glance. This is why.
fast growth
The Lancashire-based company’s most recent financial results for the 2022/23 half are tremendously promising.
Accrol’s revenue grew by 64% to £121.1m, translating into a 19% increase in gross profit to £21.7m. Furthermore, the company is also making progress in terms of claiming market share. In 2017, the company held 5.6% of the UK tissue market. Today, that figure has skyrocketed to 21.5%.
In the medium term, the group has ambitions to build a sustainable paper mill that improves the company’s efficiency prospects and routes to market.
In addition, the business has also signaled the possibility of adding shareholder value in the form of dividends or share buybacks. In my opinion, the possibility of generating passive income from the purchase of Accrol shares increases the investment attractiveness of penny stocks.
risks
Despite the excellent headline numbers, there is some cause for concern in Accrol’s latest results. First, a gross margin of 18% represents a year-over-year drop of 6.7%. This suggests that the company has made slow progress in turning higher gross profits into net profits.
Second, the group’s net debt levels increased by 41% compared to the previous semester. At £30.5m today, the debt load is a bit high for my liking. However, the company faced challenges from supply chain disruption and strikes at UK ports. These risks remain, but there is a good chance that business conditions will start to normalize as the year progresses.
Third, the inflationary environment continues to act as a headwind. Rising input costs create a difficult market environment. If high inflation persists, this would likely limit the company’s growth prospects. Similarly, if inflation falls substantially, the outlook for Accrol shares should improve.
Should I buy this penny stock?
If I had some extra money, I would invest in Accrol shares today. Overall, I believe the company has promising growth prospects, and its success in capturing significant market share in a short period is particularly impressive.
The group expects its gross margins to improve this year as the impact of the time lag in price increases seeps into the company’s results. If he achieves this goal, the case for investing in the company would be even more compelling in my opinion.
When it comes time to rebalance my portfolio, Accrol stock will be right at the top of my shopping list for penny stocks to buy.
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