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If you can identify companies that are about to turn from loss into profit then you might enjoy superlative returns. It is difficult, but not impossible

Easily the best performing share on AIM this year has been online fashion retailer ASOS. Effectively written off by the market a year ago, the company has managed to turn its fortunes around and register a maiden profit. This has allowed the shares to jump more than tenfold since the start of the year from 5p to 59p.

Backing companies that are about to move into profit can produce stellar returns. A year ago ASOS was in a perilous financial position – with its balance sheet displaying net liabilities – but has since managed to trade its way out of trouble. Sales surged 71 per cent to £7 million in 2003, allowing the group to post a £350,000 pre-tax profit.

Hot on ASOS' heels is Mercury Recycling, a perennial loss-maker that has seen its shares more than double in the last two months to 29p on the belief that it will shortly become the UK's largest recycler of products containing mercury, such as fluorescent lights.

This is a hot topic as a EU directive has been introduced this month that immediately cuts the number of UK landfill sites that will take fluorescent lighting tubes from 250 to 11. This should force more people to recycle rather than dispose of these tubes and so boost Mercury's business exponentially.

Indeed, in anticipation Mercury bought an additional recycling plant towards the end of last year, thus increasing its capacity. Last year the Manchester-based concern managed to halve losses to £97,000 as sales rose 23 per cent to £947,000. The shares could rise further if profits of £440,000 come through as expected this year. This would produce earnings of 1.32p a share, giving the group a p/e of 22.

Riskier plays

There are some other risky plays, currently marked down, that have a good chance of making a breakthrough this year.

Training company Intellexis has recently made a particularly prescient acquisition, splashing out £2.4 million for Key Skills, which has developed a training programme teaching a popular project management method called Prince2, frequently used in the public sector.

Chief executive Ken Scott believes this deal, completed at the end of the company's financial year in March, should allow turnover to more than double and 'ensure a move into profit' in the current year. Last year the existing business, which has had a chequered history, managed to cut losses from £2.04 million to £257,000 as turnover rose 16 per cent to £1.6 million.

The two businesses should have decent synergies and analysts reckon the group might make a £630,000 pre-tax profit on sales more than doubled to £3.38 million. Anticipated earnings per share of 9.2p puts Intellexis' shares on a miserly forward p/e of eight. At the current price of 74p, just above the year low of 72p, the company is worth £5 million.

Acquisitive growth

Two more AIM companies that should see their bottom lines transformed following acquisitions include software concerns i-documentsystems, which services local authorities, and Bond International, a provider of a leading software products to recruitment companies.

Bond has already moved back into profit and seen its shares shoot up from 11.5p to 50p, even before snapping up a US rival this March. However,

i-document remains stubbornly stuck around the 11p mark, despite cutting interim losses by 30 per cent to £190,000 on sales up 72 per cent to £3.3 million. The group has since bought information business TFPL. That should help create a maiden full year profit of £750,000.

Other neglected companies shortly due to break through include temporary traffic lights provider Transport Systems, internet domain name manager NetBenefit, and staffing software specialist Manpower Software, all of which have recently produced interim profits. Although representing higher risks, these shares might produce above average returns for bold investors.