Four shares for the watchlist

Each month Richard Beddard trawls through annual corporate results for his Watchlist and the Share Sleuth portfolio of companies that satisfy key valuation metrics - such as earnings yield and return on capital - and profiles the most interesting candidates.

Here are four of his latest:

Watch: Porvair

Another year of results from Porvair provides more evidence it is putting aside its unreliable past. Porvair manufactures filters and filtration systems.

Three of its four biggest markets are served by the microfiltration division: aviation, large energy and industrial projects, and laboratory testing. The other large market, filtration of molten aluminium in foundries and cast houses, is part of Porvair's second division, metals filtration.

Metals filtration is less profitable. In 2015, operating profit margins were 8%, but during the credit crunch the division made a loss, reducing the profitability of the whole business substantially.

Profit margins in the metals filtration division are 15%, about the same level as they were in 2008 and 2009.

While it's not obviously cheap, Porvair may just be worth the asking pricePorvair will never be able to dodge the business cycle entirely - but it may be less susceptible to it, having grown the more stable microfiltration business to 68% of total revenue compared to 59% in 2008, and improved its competitive position in metals filtration by developing superior patented filters.

In the year to 30 November 2015, revenue fell 8%, but underlying revenue increased 7% and adjusted profit rose 6%. Return on capital reached a post-2008 peak of 25%.

In recent years Porvair has been as profitable in cash terms as it is in accounting terms, which has enabled it to pay off its remaining debt in 2015, despite a small acquisition.

A share price of 292p values the enterprise at £135 million or about 17 times adjusted profit. The earnings yield is 6%. While it's not obviously cheap, Porvair's leading position in filtration niches may mean it's worth the asking price.

Watch: RWS

Judging by the numbers, RWS is the perfect business, but the numbers may not tell the whole story. The year to 30 September 2015 wasn't a spectacular one for RWS.

Revenue, slightly reduced by currency movements, rose 2% and adjusted profit was 6% higher than in 2014. But cash flow was strong and the results were good enough for RWS to boast of a 12th successive year of rising revenue, earnings and dividends.

A share price of 195p values the enterprise at about £480 million, 25 times adjusted profit. RWS might be worth it, because it's fantastically profitable. In recent years, return on capital has remained above 40%.

After the year-end RWS acquired a commercial translation company to bolster its non-patent business.The company's original and largest business is patent translation. In 2013, it acquired Inovia, a platform for filing foreign patents, and it also owns PatBase, a relatively low revenue-earning but extremely profitable patent database, to which it sells annual subscriptions.

RWS also does more general translation for businesses (commercial translation).

The future may not resemble the past, however, because the European Patent Office is introducing a unitary patent that will eventually only require companies to file a single patent for all the countries that have signed up.

The unitary patent has been much delayed, and even optimists don't believe it will happen before 2017, but the day is getting closer.

If the unitary patent is successful, it will surely dent RWS's profitability in the long term. Much depends on the cost of filing a unitary patent. However, it's not taking chances; after the year-end it acquired a commercial translation company to bolster its non-patent business.

Watch: SThree

Like rival recruitment companies, SThree's main asset is its expert recruiters. They are also its chief weakness.

In the year to 30 November 2015, SThree earned 14% more revenue and 26% more adjusted profit than it did in the previous year. Using the company's adjustments, the profit figure is even higher.

Cash flow also improved dramatically, as growth in the number of contractors placed by SThree slowed. Placing contractors (staff on short-term contracts) reduces cash flow, because SThree pays the contractors before it receives payment from the companies it places them with.

SThree specialises in recruiting staff through independently branded businesses, principally for information and communications technology companies (Computerfutures, its first business), energy (Progressive Recruitment), banking and finance (Huxley, its biggest business), and life sciences (Real Staffing).

With recruiters threatened by social networks, SThree's expert recruiters could become an expensive luxury.The company's improving fortunes come from the closure of loss-making offices and an emphasis on providing temporary contract staff rather than permanent staff. Today 64% of placements are on short-term contracts, which are more valuable to SThree.

A share price of 309p values SThree at £400 million, or about 15 times adjusted profit. The earnings yield is 7%. The shares could be good value.

Specialisation leads to high levels of profitability and SThree earned a 22% return on capital in 2015. But it's been less profitable in previous years, and it probably will be again when recessionary conditions exist.

Long-term, recruitment companies are threatened by social networks and internet-based recruitment systems, which promise to reduce the cost of aspects of recruitment. SThree's expert recruiters might yet become an expensive luxury.

Watch: Topps Tiles

With all the numbers moving in the right direction and recovery turning into growth, the UK's leading tile store is growing. The 53 weeks to 3 October 2015 were a record year for revenue: Topps raised it 9% and adjusted profit 17%.

Return on capital was a worthy 11%, although these figures ignore various one-off costs including the closure of seven clearance stores, a store format the company no longer operates.

If the year had been 52 weeks long, revenue would have increased a little less than 7%, and by just over 5% on a like-for-like basis (ignoring the contributions of stores that opened during the year).

In 2015, Topps achieved its target - to gain a one-third share of the domestic tiling market - a year early.

The results are an endorsement of Topps' strategy, which is to "out-specialise" the specialists by offering a large variety of tiles sourced in collaboration with manufacturers and printers, exclusive ranges and expert customer service.

Shareholders should consider that the housing market could deteriorate, making Topps something of a gambleIt claims its "multichannel" offering gives it a competitive advantage over online-only tile merchants. No doubt its relationships with suppliers and its bargaining power also give it a competitive advantage over smaller rivals.

In pursuit of growth, Topps is trialling a boutique store format for smaller high streets, and evaluating the commercial sector. That would nearly double the size of Topps' market.

The shares are far from cheap, though. A share price of 141p values the enterprise at just over £470 million, or about 20 times adjusted profit.

The earnings yield is just 5%, so growth, either from Topps' strategy or from a resurgent housing market (which in turn would encourage more home improvement), is required for decent returns.

While both scenarios may come to pass, shareholders should consider the possibility that the housing market deteriorates, making Topps shares something of a gamble. The company reports house purchases are well above their lows of 2009, but still well below their highs of 2007.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.