Small cap technology stocks present an interesting dilemma. These are the stocks that can offer investors amazing payouts, but they are viewed as the most risky, because they are in their infancy stage. A proven strategy for reducing that risk is to find small caps with well developed projections for expansion and substantial reserves of cash to foster growth to take the company to the next level. The following companies have both qualities and are worth a second look.
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).
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 Operating Profit Margin is a profitability ratio that measures the effectiveness of the company's operating efficiency. This metric allows investors to see how much profit is left after all variable costs are covered. If the company's margin is increasing over time this means that it's earning more per dollar of sales. Finding trends in the Operating Profit Margin helps investors identify companies that are improving profitability over time and managing the economic landscape better than competitors.
We first looked for small cap technology stocks. We next screened for businesses with a large amount of cash on hand (Current Ratio>2)(Quick Ratio>2). From here, we then looked for companies that have strong profitability (1-year fiscal EPS Growth Rate>10%)(1-year operating margin>15%).
Do you think these small-cap stocks have strong enough fundamentals to move higher? Use our screened list as a starting point for your own analysis.
1) Ultratech, Inc. (UTEK)
|Industry:||Semiconductor Equipment & Materials|
Ultratech, Inc. has a Current Ratio of 6.11, a Quick Ratio of 5.32, a Earnings Per Share Growth Rate of 118.63%, and a Operating Profit Margin of 22.56%. The short interest was 3.56% as of 07/25/2012. Ultratech, Inc. develops, manufactures, and markets photolithography and laser thermal processing equipment. It supplies step-and-repeat photolithography systems based on one-to-one imaging technology to semiconductor device manufacturers for applications involving line geometries of 0.75 microns or greater and to nanotechnology manufacturers.
2) InvenSense, Inc. (INVN)
|Industry:||Semiconductor Equipment & Materials|
InvenSense, Inc. has a Current Ratio of 14.10, a Quick Ratio of 13.17, a Earnings Per Share Growth Rate of 1713.57%, and a Operating Profit Margin of 30.74%. The short interest was 14.53% as of 07/25/2012. InvenSense, Inc. designs, develops, markets, and sells micro-electro-mechanical systems [MEMS] gyroscopes for motion tracking devices in consumer electronics. The company delivers motion interface solutions based on its multi-axis gyroscope technology by targeting applications in video gaming devices, smartphones, tablet devices, digital still and video cameras, smart TVs, 3D mice, wearable health and fitness monitors, optical image stabilization products, and portable navigation devices. It offers MotionProcessor units (MPUs), inertial measurement units (IMUs), and MEMS gyroscopes.
3) Raven Industries Inc. (RAVN)
|Industry:||Printed Circuit Boards|
Raven Industries Inc. has a Current Ratio of 3.28, a Quick Ratio of 2.19, a Earnings Per Share Growth Rate of 23.65%, and a Operating Profit Margin of 20.24%. The short interest was 3.70% as of 07/25/2012. 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.
4) 8x8 Inc. (EGHT)
8x8 Inc. has a Current Ratio of 3.43, a Quick Ratio of 3.39, a Earnings Per Share Growth Rate of 901.09%, and a Operating Profit Margin of 21.57%. The short interest was 13.16% as of 07/25/2012. 8x8, Inc. develops and markets telecommunications services for Internet protocol (IP), telephony, and video applications. It also offers contact center, Web-based conferencing, and unified communications services, as well as cloud-based computing services. The company provides the 8x8 Virtual Office, a hosted private branch exchange service targeting the small and medium-sized business market; the 8x8 Virtual Contact Center service, an integrated hosted call center solution that works with various broadband Internet connections and offers enterprise class contact center functionality combined with Virtual Office calling features; the 8x8 Virtual Office Pro unified communications solution that allows subscribers to manage business communications functions online through a centralized Web-based portal through a PC, laptop, tablet, or smart phone; and the 8x8 managed hosting and cloud-based computing solutions for business customers.
5) Quality Systems Inc. (QSII)
|Industry:||Healthcare Information Services|
Quality Systems Inc. has a Current Ratio of 2.42, a Quick Ratio of 2.39, a Earnings Per Share Growth Rate of 21.12%, and a Operating Profit Margin of 27.03%. The short interest was 10.21% as of 07/25/2012. Quality Systems, Inc., together with its subsidiaries, engages in the development and marketing of healthcare information systems in the United States. The company operates in four divisions: QSI Dental, NextGen, Hospital Solutions, and Revenue Cycle Management [RCM] Services. The QSI Dental division develops, markets, and supports software suites for dental organizations.
*Company profiles were sourced from Finviz. Financial data was sourced from Google Finance and Yahoo Finance.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.