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Several days ago, Streamline Health Solutions (NASDAQ:STRM) reported the significant improvement in its EPS in the recent quarter compared to the same period last year. The health care information technology company recorded a profit of more than $490,000, with EPS of $0.05 in first quarter 2012. It is much better than the loss of $280,000, or $0.03 per share in the comparable period. The reported revenue is $5.4 million, marking the growth of 32% from last year. The increase in revenue is due to the gain of software as a service through the recent acquisition of Interpoint Partners.

With the very positive news, its stock price has advanced significantly from $3 to $3.55. Same time last month, its stock price was only $2, and it has delivered the gain of 77.5% within a month.

(click to enlarge)

Ycharts.com

As mentioned above, more than 40% of revenue increase in this quarter is attributable to the acquisition of Interpoint Partners, not organic growth. Along with the acquisition made at the end of last year, the company recorded more than $4 million in goodwill. So for the first quarter 2012, Streamline had $8.6 million shareholder equity in the total asset of $24.6 million. In the asset side, the goodwill is $4 million, capitalized cost of software development is $9.6 million. And in the total liabilities of nearly $16 million, it has $8.3 million in term loan, convertible note and contingent consideration for earn-out.

With the current price, the market is valuing Streamline at 43.5x earnings, more than 4 times its book value and 7.2x cash flow.

I would personally restrain from participating in the stock in the upswing for several reasons:

  • The growth is not organic, mainly from the acquisition

  • The acquisition left the large goodwill item in the balance sheet, which is not the tangible asset

  • The acquisition was financed by term loan matured in 2013, convertible debt and contingent consideration for earn-out ending 2013.

  • High valuation

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: Streamline Health: Be Careful With 77.5% Monthly Gain