Interested in following smaller tech companies? In the case of small cap tech stocks, you have greater risk, but you also might have the next Facebook on your hands. One promising place to look for small cap tech stocks is to look for companies have both strong earnings and cash to spend. Company liquidity ( i.e. cash to spend ) is an important consideration in any stock analysis. Liquidity gives a company the ability to make big acquisitions if it sees investment opportunities, a cushion for future lulls in demand, and most importantly, it keeps a company's doors open. Are these the types of stocks that you're looking for? If so, we ran a screen keeping this idea in mind.
Return on Equity [ROE] is one way to identify great potential names relative to profitability. This ratio illustrates the percentage return on shareholder equity. As well, this metric segments the company into operational efficiency, asset use efficiency, and financial leverage. Why does this matter? Simply put, it allows investors to get a real picture of how the company is generating these returns and helps identify parts of the company that may be underperforming.
EPS growth (earnings per share growth) illustrates the growth of earnings per share over time. EPS growth rates help investors identify stocks that are increasing or decreasing in profitability. This profitability metric is generally a key driver in the price of the stock as it directly correlates to the profitability of the company as a whole.
The Current ratio is a liquidity ratio used to determine a company's financial health. The metric illustrates how easily a firm can pay back its short obligations all at once through current assets. A company that has a current ratio of one or less is generally a liquidity red flag. Now this doesn't mean the company will go bankrupt tomorrow, but it also doesn't bode well for the company, and may indicate that it could have an issue paying back upcoming obligations.
The Quick ratio measures a company's ability to use its cash or assets to extinguish its current liabilities immediately. Quick assets include assets that presumably can be converted to cash at close to their book values. A company with a Quick Ratio of less than 1 cannot currently pay back its current liabilities. The quick ratio is more conservative than the Current Ratio because it excludes inventory from current assets, since some companies have difficulty turning their inventory into cash. If short-term obligations need to be paid off immediately, sometimes the current ratio would overestimate a company's short-term financial strength. In general, the higher the ratio, the greater the company's liquidity (i.e., the better able to meet current obligations using liquid assets).
We first looked for small cap technology stocks. We then looked for companies that have been able to maintain a sound level of profitability for shareholders (ROE [TTM]>30%)(1-year fiscal EPS Growth Rate>10%). We next screened for businesses that have strong liquidity (Current Ratio>2)(Quick Ratio>2).
Do you think these small-cap stocks should be priced higher? Use our screened list as a starting point for your own analysis.
1) Raven Industries Inc. (RAVN)
|Industry:||Printed Circuit Boards|
Raven Industries Inc. has a Return on Equity of 30.72%, a Earnings Per Share Growth Rate of 23.65%, a Current Ratio of 3.28, and a Quick Ratio of 2.19. The short interest was 3.16% as of 06/10/2012. Raven Industries, Inc., together with its subsidiaries, manufactures various products for industrial, agricultural, energy, construction, and military/aerospace markets primarily in North America. It operates in four segments: Applied Technology, Engineered Films, Aerostar, and Electronic Systems. The Applied Technology segment designs, manufactures, sells, and services precision agriculture products and information management tools enabling growers to enhance farm yields.
2) RDA Microelectronics, Inc. (RDA)
|Industry:||Semiconductor Equipment & Materials|
RDA Microelectronics, Inc. has a Return on Equity of 34.54%, a Earnings Per Share Growth Rate of 241.53%, a Current Ratio of 3.20, and a Quick Ratio of 2.70. The short interest was 4.24% as of 06/10/2012. RDA Microelectronics, Inc., a semiconductor company, designs, develops, and markets radio-frequency and mixed-signal system on chip integrated circuits for the cellular, broadcast, and connectivity markets. Its products include power amplifiers, radio frequency front-end modules, Bluetooth system-on-chips, FM radio receivers, set-top box tuners, transceivers, analog mobile television receivers, China multimedia mobile broadcasting television receivers, walkie-talkie transceivers, LNB satellite down converters, and WiFi + Bluetooth + FM three-in-one combo chips. The company's products are incorporated into mobile handsets, set-top boxes, MP3 players, and other wireless and consumer electronic devices.
3) Computer Programs & Systems Inc. (CPSI)
|Industry:||Healthcare Information Services|
Computer Programs & Systems Inc. has a Return on Equity of 49.14%, a Earnings Per Share Growth Rate of 36.98%, a Current Ratio of 2.84, and a Quick Ratio of 2.74. The short interest was 7.25% as of 06/10/2012. Computer Programs and Systems, Inc., a healthcare information technology company, designs, develops, markets, installs, and supports computerized information technology systems to small and midsize hospitals in the United States. Its enterprise-wide system automates the management of clinical and financial data across the primary functional areas of a hospital. The company offers services that enable customers to outsource certain data-related business processes in the areas of clinical care, revenue cycle management, cost control, and regulatory compliance.
*Company profiles were sourced from Finviz. Financial data was sourced from Finviz and Yahoo Finance.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.