Some people consider the terms small cap stocks and technology to equal high risk investing. But not everyone feels that way. Especially when the tech companies in question are bringing in strong profits and have very little long term debt. These two traits can lead to companies that have fiscal controls that are carefully watching profit margins and making conservative decisions when it comes to leveraging assets to further growth. If small cap stocks with these qualities interest you then you will like the short list we cultivated today.
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.
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.
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.
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.
We first looked for small cap technology stocks. We then screened for businesses that operate with little to no long term debt (Long Term D/E Ratio<.1). We then looked for businesses that operate with little to no debt (D/E Ratio<.1). We then looked for companies that have posted strong earnings growth for shareholders over an extended period of time (1-year fiscal EPS growth rate>10%)(ROE [TTM]>30%).
Do you think these small-cap stocks will go up in valuation? Use our screened list as a starting point for your own analysis.
1) Medidata Solutions, Inc. (MDSO)
|Industry||Healthcare Information Services|
|Long Term Debt/Equity Ratio||0.00|
|Earnings Per Share Growth Rate||68.50%|
|Return on Equity||35.84%|
Medidata Solutions, Inc. provides software-as-a-service based clinical development solutions for life science organizations worldwide. Its solutions comprise software and services that allow customers to increase the value of their development programs by designing, planning, and managing key aspects of the clinical trial process, including study and protocol design, trial planning and budgeting, site negotiation, clinical portal, trial management, randomization and trial supply management, clinical data capture and management, safety events capture, medical coding, clinical business analytics, and data flow and interoperability.
The company primarily offers Medidata Rave, a comprehensive platform for capturing and managing clinical data. It also provides Medidata CTMS, a clinical trial management solution that streamlines operational workflows; Medidata Designer, a protocol development tool that enhances the efficiency of clinical trial start-up; Medidata Insights, a business analytics platform; and Medidata Balance, a randomization and trial supply management solution, which streamlines the process of developing, building, and implementing subject allocation plans. In addition, the company offers Medidata Grants Manager, an application to benchmark the investigator budgets against industry data; Medidata contract research organization (CRO) Contractor, an analytical tool for CRO outsourcing, budgeting, and negotiation; and iMedidata, a hosted portal application that allows investigative sites and sponsor study teams to start trial activities. Further, it provides hosting, support, and professional services. The company serves pharmaceutical, biotechnology, and medical device companies; academic institutions; and CROs and other entities engaged in clinical trials through a direct sales force; and through relationships with CROs and other strategic partners. The company was founded in 1999 and is headquartered in New York, New York.
2) Changyou.com Limited (CYOU)
|Industry||Multimedia & Graphics Software|
|Long Term Debt/Equity Ratio||0.00|
|Earnings Per Share Growth Rate||25.65%|
|Return on Equity||43.82%|
Changyou.com Limited develops and operates online games in the People's Republic of China. The company is primarily involved in the development, operation, and licensing of massively multi-player online games (MMOGs), which are interactive online games that might be played simultaneously by various game players, and Web-based games, which are played over the Internet using a Web browser. It also owns and operates the 17173.com Website, a game information portal in China.
The company operates various MMOGs that include its in house developed Tian Long Ba Bu, DDTank, and Duke of Mount Deer; and licensed Blade Online, Blade Hero 2, Da Hua Shui Hu, Zhong Hua Ying Xiong, Legend of Ancient World, Immortal Faith, and San Jie Qi Yuan. As of December 31, 2011, it had approximately 175.5 million aggregate registered accounts; 1.2 million aggregate peak concurrent users; and 3.2 million aggregate active paying accounts. The company was founded in 2003 and is based in Beijing, the People's Republic of China. Changyou.com Limited is a subsidiary of Sohu.com Inc.
3) 8x8 Inc. (EGHT)
|Long Term Debt/Equity Ratio||0.00|
|Earnings Per Share Growth Rate||901.09%|
|Return on Equity||104.10%|
8x8, Inc. develops and markets telecommunications services for Internet protocol, 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.
In addition, it offers the 8x8 IP Telephones, such as various models of Polycom IP phones and speakerphones featuring high definition HD audio, corporate directory display and lookup, intercom paging, shared line appearance, and power over Ethernet. The company markets its services under the 8x8 brand to end users through direct sales force, Website, and third party resellers primarily in the United States. As of March 31, 2012, it had approximately 28,500 business customers. 8x8, Inc. was founded in 1987 and is headquartered in Sunnyvale, California.
*Company profiles were sourced from Google Finance and Yahoo Finance. Financial data was sourced from Finviz on 09/06/2012.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.