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What is EBITDA? It's an indicator of a company's financial performance, which is calculated via the following:

It's a good metric to evaluate profitability, but not cash flow, as it leaves out the cash required to fund working capital and the replacement of old equipments known as Capital Expenditures or CAPEX, which can be a significant cash expense, not recorded in the Income Statement. Therefore EBITDA - CAPEX is a more practical assessment of earnings that with just EBITDA.

It's important to note here that since interest is excluded from EBITDA, EBITDA - CAPEX should be used in ratio with the Enterprise Value or EV.

Enterprise Value = Market Capitalization +Debt -Cash and Cash Equivalents.

Ideal Valuation Ratio = EV / EBITDA−CAPEX

Following are the stocks in the Application Software Industry With Positive EBITDA-CAPEX Margin.

AutoNavi Holdings Limited (NASDAQ:AMAP)

Provides digital map content, and navigation and location-based solutions in the People’s Republic of China. A look at the company's financial performance for the Trailing Twelve Months ending September 30, 2012:

Source: SEC Filings

The company reported EBITDA in LTM of approximately $47M. However, it also incurred an average cash expense in the form of Capital Expenditure of $10M, which was not recorded in the Income Statement, as shown in the Cash Flow Statement below:

(click to enlarge)

Source: SEC Filings

Therefore the company has EBITDA-CAPEX of 47-10 = $37M or with a margin of almost 25% on revenue of $151M.

As of September 30 2012, the company had 48M shares outstanding on a fully diluted basis. It also had $205M in Net cash and cash equivalents on hand. Using PPS of $11.75 from the chart below, the EV value of the company will be:

EV = 11.75*48 - 205 = $359M

(click to enlarge)

Hence the Ideal Valuation Ratio of the company will be:

EV / EBITDA−CAPEX = 359/37 or 9.70

A number below 15 indicates healthy cash flow (excluding working capital changes), I therefore recommend buying this stock.

American Software, Inc. (NASDAQ:AMSWA)

Engages in the development, marketing, and support a portfolio of software and services that deliver enterprise management and collaborative supply chain solutions worldwide. A look at the company's financial performance for the Trailing Twelve Months ending October 31, 2012:

Source: SEC Filings

The company reported EBITDA in LTM of approximately $18M. However, it also incurred an average cash expense in the form of Capital Expenditure of $1M, which was not recorded in the Income Statement, as shown in the Cash Flow Statement below:

(click to enlarge)

Source: SEC Filings

Therefore the company has EBITDA-CAPEX of 18-1 = $17M or with a margin of almost 16% on revenue of $106M.

As of October 31 2012, the company had 28M shares outstanding on a fully diluted basis. It also had $65M in Net cash and cash equivalents. Using PPS of $8.25 from the chart below, the EV value of the company will be:

EV = 8.25*28 - 65 = $166M

(click to enlarge)

Hence the Ideal Valuation Ratio of the company will be:

EV / EBITDA−CAPEX = 166/17 or 9.80

A number below 15 indicates healthy cash flow (excluding working capital changes), I therefore recommend buying this stock.

ARC Document Solutions, Inc. (NYSE:ARC)

Operates as a reprographics company and provides specialized document solutions to various businesses. A look at the company's financial performance for the Trailing Twelve Months ending September 30, 2012:

Source: SEC Filings

The company reported EBITDA in LTM of approximately $63M. However, it also incurred an average cash expense in the form of Capital Expenditure of $17M, which was not recorded in the Income Statement, as shown in the Cash Flow Statement below:

(click to enlarge)

Source: SEC Filings

Therefore the company has EBITDA-CAPEX of 63-17 = $46M or with a margin of almost 11% on revenue of $411M.

As of September 30, 2012, the company had 46M shares outstanding on a fully diluted basis. It also had $200M in Net Debt. Using PPS of $2.5 from the chart below, the EV value of the company will be:

EV = 2.5*46 +200= $315M

(click to enlarge)

Hence the Ideal Valuation Ratio of the company will be:

EV / EBITDA−CAPEX = 315/46 or 6.90

A number below 15 indicates healthy cash flow (excluding working capital changes), I therefore recommend buying this stock.

AVG Technologies N.V. (NYSE:AVG)

Engages in the development and sale of Internet security software and online service solutions under the AVG brand name. A look at the company's financial performance for the Trailing Twelve Months ending September 30, 2012:

Source: SEC Filings

The company reported EBITDA in LTM of approximately $99M. However, it also incurred an average cash expense in the form of Capital Expenditure of $11M, which was not recorded in the Income Statement, as shown in the Cash Flow Statement below:

(click to enlarge)

Source: SEC Filings

Therefore the company has EBITDA-CAPEX of 99-11 = $88M or with a margin of almost 26% on revenue of $335M.

As of September 30 2012, the company had 55M shares outstanding on a fully diluted basis. It also had 70M in Net Debt. Using PPS of $15.75 from the chart below, the EV value of the company will be:

EV = 15.75*55 + 70 = $936M

(click to enlarge)

Hence the Ideal Valuation Ratio of the company will be:

EV / EBITDA−CAPEX = 936/88 or 10.60

A number below 15 indicates healthy cash flow generation by company (excluding working capital changes) and therefore I recommend buying this stock.

Actuate Corporation (NASDAQ:BIRT)

Provides software solutions and consulting services to corporate and government customers worldwide. A look at the company's financial performance for the Trailing Twelve Months ending September 30, 2012:

Source: SEC Filings

The company reported EBITDA in LTM of approximately $27M. However, it also incurred an average cash expense in the form of Capital Expenditure of $5M, which was not recorded in the Income Statement, as shown in the Cash Flow Statement below:

(click to enlarge)

Source: SEC Filings

Therefore the company has EBITDA-CAPEX of 27-5 = $22M or with a margin of almost 16% on revenue of $139M.

As of September 30, 2012, the company had 53M shares outstanding on a fully diluted basis. It also had $75M in cash and cash equivalents. Using PPS of $5.50 from the chart below, the EV value of the company will be:

EV = 5.50*53 -75 = $217M

(click to enlarge)

Hence the Ideal Valuation Ratio of the company will be:

EV / EBITDA−CAPEX = 217/22 or 9.90

A number below 15 indicates healthy cash flow (excluding working capital changes), I therefore recommend buying this stock.

Source: 5 Little Known Application Software Companies With Positive EBITDA-CAPEX Margins