Smaller quoted businesses listed on the UK stock market are being undervalued, putting their ability to attract investment at risk.
The 2005 Hidden Gems Index, produced by international accountancy and business advisory firm RSM Robson Rhodes, showed small and medium-sized listed firms had grown cash flow by more than three times the market average, but were not being rewarded by similar share price performance.
The top 50 companies in the index achieved cash flow growth of more than180 per cent, compared to just 58 per cent for the market as a whole.
This performance, based on historic and forecast data, has yet to be reflected in the valuation of these businesses.
The survey found the top 50 to be trading at an average multiple of nine times share price to forecast free cash flow compared to 15 times for the market.
Analysts use cash flow growth as one of the clearest indicators of company performance, a trend which is likely to increase under IFRS, and has a significant impact on share price performance.
The FTSE 250 and smallcap companies feature most heavily in the Top 50 Hidden Gems Index, accounting for 90 per cent of the index, despite the FTSE 250 outperforming the FTSE 100 by almost two to one in share price terms in the last 12 months
A key theme that emerged in this year's survey was that companies going through some form of restructuring, corporate activity or management change, did not receive the rating to match their improved operational performance.
Tom Lawton, RSM Robson Rhodes partner and head of listed company services, said: "This is our fifth annual survey and it continues to explain the frustrations felt by many directors of small and mid-cap companies - namely that their excellent cash flow growth is not recognised by the markets in their valuation.
"It is interesting in this year's survey that those companies featured in the top 50 may not be able to fully capitalise on the current market conditions."
Mr Lawton also said that with the increase in mergers and acquisitions, companies with a lower value than their performance perhaps merits may find themselves at risk from an unwelcome suitor or unable to fund their growth strategies.
Mr Lawton also sent a warning to companies going through restructuring or a management change.
He said: "These companies are not being awarded a stock market rating to match their operational performance.
"They need to demonstrate that a recovery plan is fully in place and that their recovery strategy is working."