When a company of the small cap size wants to grow the business, it is not unusual to accumulate debt. Especially when they have strong profits and feel confident that the debt can be quickly repaid. However, too much debt tends to weigh a company down and limit options. With this in mind, we searched for small cap stocks that are reliable earners in terms of profit. Then we narrowed the field to include only those that have either bootstrapped their operations or kept the debt down to minimal levels. We consider low debt as a sign that the company has savvy management and a solid strategy for generating income. If these traits appeal to you, then you will like our list of small cap stocks.
The Debt/Equity Ratio illustrates how aggressively a company is financing its growth via debt. The more debt financing that is used in a capital structure, the more volatile earnings can become due to the additional interest expense. Should a company's potentially enhanced earnings fail to exceed the cost associated with debt financing over time, this can lead the company toward substantial trouble.
The Long Term Debt/Equity Ratio is a variation of the traditional debt-to-equity ratio; this value computes the proportion of a company's long-term debt compared to its available capital. By using this ratio, investors can identify the amount of leverage utilized by a specific company and compare it to others to help analyze the company's risk exposure. Generally, companies that finance a greater portion of their capital via debt are considered riskier than those with lower leverage ratios.
Return on Assets (ROA) illustrates how much a company is generating in earnings from its assets alone. This metric gives investors a picture of how profitable the company is relative to the assets in current possession. As well, it lets investors see how efficient and effective management is at generating earnings from the company's assets. While most management teams can probably make money by throwing money at an issue, very few can make very large profits with little investment.
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.
We first looked for small cap stocks. We then screened for businesses that operate with little to no debt (D/E Ratio<.1). We then looked for companies that operate with little to no long term debt (Long Term D/E Ratio<.1). We then screened for businesses with strong profitability (ROA > 10%)(1-year fiscal EPS growth rate>10%). We did not screen out any sectors.
Do you think these small-cap stocks will offer healthy returns? Use our screened list as a starting point for your own analysis.
1) Hollysys Automation Technologies, Ltd (HOLI)
|Industry||Industrial Electrical Equipment|
|Long Term Debt/Equity Ratio||0.07|
|Return on Assets||11.19%|
|Earnings Per Share Growth Rate||33.44%|
Hollysys Automation Technologies Ltd. provides automation and control technologies and applications to customers in the industrial, railway, subway, and nuclear industries in China and south-east Asia. It offers distributed control systems, which are networks of controllers, sensors, actuators and other devices that can be programmed to control outputs based on input conditions and/or algorithms; programmable logic controllers that are small computer devices installed on machines or equipment; and train control centers (TCC), which monitor route condition, track status, train schedules, distance between trains, and the working status of other essential function devices. The company also provides automatic train protection system that acts as a train over-speed protection mechanism, which collects real-time information, such as speed limit ahead, train operation status, line data, and instructions from TCC; and combines it with the train parameters to produce train protection curves. In addition, it offers HOLLiAS NMS control systems used for safety and operation control purposes in nuclear power plants; surveillance control and data acquisition system, an open software platform that enables the integrated and unified monitoring of sub-systems of the subway, including the power supervisory control and data acquisition system, building automatic system, fire alarm system, platform screen door system, access control system, closed circuit television, passenger information system, passenger train information system, and alarm system. The company was formerly known as HLS Systems International Ltd., and changed its name to Hollysys Automation Technologies Ltd. in July 2009. The company was founded in 1993, and is headquartered in Beijing, China.
2) Higher One Inc. (ONE)
|Long Term Debt/Equity Ratio||0.08|
|Return on Assets||21.91%|
|Earnings Per Share Growth Rate||22.46%|
Higher One Holdings, Inc. provides technology and payment services in the United States. It offers a suite of disbursement and payment solutions for higher education institutions and their students. The company provides OneDisburse Refund Management product, which offers higher education institutional clients with a technology service for streamlining the student refund disbursement process. It also offers CASHNet Payment suite, which includes software-as-a-service products and services, such as ePayment to securely accept online payments for tuition, charges, and fees from students through credit card, pinless debit, and ACH; eBill to automate payer billing and processing functions; MyPaymentPlan to personalize students' payment plans; eMarket, which allows academic, athletic, and other departments to take alumni donations, sell event tickets and other merchandise, and accept payments of event and conference registration fees; and Cashiering to operate and manage cashiering functions, back office payments, and campus-wide departmental deposits. In addition, the company provides OneDisburse ID, which offers an option to combine the company's debit card with the institution's ID cards; OneDisburse Payroll to distribute payroll and other employee-related payments; OneDisburse PLUS product to distribute Parent PLUS loan refunds to parents on behalf of the school; and Financial Intelligence to students with an online class. Further, it provides student-oriented banking services to campus communities. Additionally, the company offers OneAccount product for students, as well as faculty, staff, and alumni, with an FDIC-insured online checking account and a debit MasterCard ATM card. Higher One Holdings, Inc. was founded in 2000, and is headquartered in New Haven, Connecticut.
3) NL Industries Inc. (NL)
|Long Term Debt/Equity Ratio||0.06|
|Return on Assets||13.69%|
|Earnings Per Share Growth Rate||20.24%|
NL Industries, Inc., through its subsidiary, CompX International Inc., operates in the component products industry in the United States, Canada, and Taiwan. Its Security Products division manufactures and sells mechanical and electrical cabinet locks, and other locking mechanisms, including disc tumbler locks, pin tumbler locking mechanisms, and eLock electronic locks for use in postal, office and institutional furniture, transportation, vending, tool storage, and other general cabinetry applications. The company's Furniture Components division manufactures precision ball bearing slides and ergonomic computer support systems for use in file cabinets, desks, computer server racks, wall mounted computer applications, home appliances, tool storage cabinets, imaging equipment, and automated teller machines. This division offers integrated slide locks, adjustable ball locks, self-closing slides, articulating computer keyboard support arms, lever lock keyboard arms, CPU storage devices, and flat panel computer monitor support systems, as well as keyboard, monitor, and CPU wall mounts. Its Marine Components division manufactures and distributes stainless steel exhaust headers, exhaust pipes, mufflers, and other exhaust components; gauges, such as GPS speedometers and tachometers; controls, throttles, steering wheels, and other billet accessories; and dash panels, LED lighting, rigging, and other accessories primarily for performance and ski/wakeboard boats. The company sells its component products directly to OEM customers, as well as through independent manufacturers' representatives. It also produces and markets titanium dioxide pigments for a range of customer applications and end-use markets, including coatings, plastics, paper, and other industrial and consumer products; and provides insurance brokerage and risk management services. The company was founded in 1891 and is based in Dallas, Texas. NL Industries, Inc. is a subsidiary of Valhi, Inc.
4) Vera Bradley, Inc. (VRA)
|Industry||Textile - Apparel Footwear & Accessories|
|Long Term Debt/Equity Ratio||0.05|
|Return on Assets||28.03%|
|Earnings Per Share Growth Rate||13.96%|
Vera Bradley, Inc., through its subsidiary, Vera Bradley Designs, Inc., engages in the design, production, marketing, and retail of stylish and functional accessories for women under the Vera Bradley brand. Its products include a range of handbags, accessories, and travel and leisure items. The company sells its products to specialty retailers primarily in the United States, as well as to national retailers and third party e-commerce sites. As of January 28, 2012, it sold its products directly through 48 full-price stores and eight outlet stores in the United States; seven pop-up stores in Japan; Websites, including verabradley.com and verabradley.co.jp; and an annual outlet sale in Fort Wayne, Indiana. The company was founded in 1982, and is headquartered in Fort Wayne, Indiana.
5) Dice Holdings, Inc. (DHX)
|Industry||Staffing & Outsourcing Services|
|Long Term Debt/Equity Ratio||0.08|
|Return on Assets||11.58%|
|Earnings Per Share Growth Rate||74.95%|
Dice Holdings, Inc. provides specialized career websites and career fairs for professional communities. The company targets employment categories where there is a long-term scarcity of qualified professionals relative to market demand. Its career websites serve as online marketplaces where employers and recruiters find and recruit prospective employees, and where professionals find relevant job opportunities and information to further their careers. The company operates in four segments: Tech and Clearance, Finance, Energy, and Other. The Tech and Clearance segment operates Dice.com, a recruiting and career development website for technology and engineering professionals in the United States; and ClearanceJobs.com, an Internet-based career network to matching security-cleared professionals with hiring companies searching for employees. The Finance segment operates eFinancialCareers.com, a recruiting and career development website for financial market professionals and financial services industry worldwide. The Energy segment operates Rigzone.com, a career website that delivers online content, data, advertising, and career services for the oil and gas industry. The Other segment produces and hosts career fairs and open houses, which focus primarily on technology, energy, and security-cleared candidates in the United States; and operates AllHealthcareJobs.com, a career website for matching healthcare professionals with available career opportunities. The company serves small, mid-sized, and large direct employers and staffing companies, recruiting agencies, and consulting firms. Dice Holdings, Inc. was founded in 1991, and is headquartered in New York, New York.
6) Buffalo Wild Wings Inc. (BWLD)
|Long Term Debt/Equity Ratio||0.07|
|Return on Assets||11.73%|
|Earnings Per Share Growth Rate||29.80%|
Buffalo Wild Wings, Inc. engages in the ownership, operation, and franchise of restaurants primarily in the United States. It offers chicken and various food and beverage items, as well as serves bottled beers, wines, and liquor. The company operates its restaurants under the Buffalo Wild Wings Grill & Bar brand name. As of July 24, 2012, it operated approximately 837 Buffalo Wild Wings locations in 48 states in the United States, as well as in Canada. Buffalo Wild Wings, Inc. was founded in 1982 and is headquartered in Minneapolis, Minnesota.
7) Virtus Investment Partners, Inc. (VRTS)
|Long Term Debt/Equity Ratio||0.10|
|Return on Assets||69.27%|
|Earnings Per Share Growth Rate||1919.39%|
Virtus Investment Partners, Inc. provides investment management products and services to individuals and institutions in the United States. The company operates a multi-manager asset management business, comprising various individual affiliated managers, each with its own investment style, autonomous investment process, and individual brand. It supplements the investment capabilities of its affiliated managers partnering with select unaffiliated sub-advisors whose strategies are not available to retail mutual fund customers. The company is headquartered in Hartford, Connecticut.
*Company profiles were sourced from Google Finance and Yahoo Finance. Financial data was sourced from Finviz on 08/27/2012.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.