Small-cap stocks tend to offer investors greater growth opportunities than large-cap alternatives, although this comes with its fair share of added risk. Are you looking for small-caps? Do you prefer companies with strong profits? Do you feel better knowing your favorite companies have enough cash to cover their operating expenses for a very long time? If the answer is 'yes', here are some interesting ideas to get you started.
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.
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.
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 stocks. We next screened for businesses that have been able to maintain a sound level of profitability for shareholders (ROE [TTM]>30%)(ROA [TTM]>10%). We then looked for businesses with a large amount of cash on hand (Current Ratio>2)(Quick Ratio>2). We did not screen out any sectors.
Do you think these small-cap stocks are at too low of valuations, given their fundamentals? Use this list as a starting-off point for your own analysis.
1) Computer Programs & Systems Inc. (NASDAQ:CPSI)
|Industry:||Healthcare Information Services|
Computer Programs & Systems Inc. has a Return on Equity of 49.75% and Return on Assets of 37.34% and Current Ratio of 3.25 and Quick Ratio of 3.14. The short interest was 5.20% as of 05/04/2012. 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.
2) C&J Energy Services, Inc. (CJES)
|Industry:||Oil & Gas Equipment & Services|
C&J Energy Services, Inc. has a Return on Equity of 64.21% and Return on Assets of 42.41% and Current Ratio of 2.83 and Quick Ratio of 2.26. The short interest was 97.99% as of 05/04/2012. C&J Energy Services, Inc., through its subsidiaries, provides hydraulic fracturing, coiled tubing, and pressure pumping services to oil and natural gas exploration and production companies. The company offers hydraulic fracturing services to enhance the production of oil and natural gas from formations with low permeability; coiled tubing services to perform various functions associated with well-servicing operations and to facilitate completion of horizontal wells; and pressure pumping services, which include well injection, cased-hole testing, workover pumping, mud displacement, wireline pumpdowns, and pumping-down coiled tubing. It also constructs and sells oilfield equipment comprising hydraulic fracturing pumps, coiled tubing units, pressure pumping units, and other equipment for third-party customers in the energy services industry; and provides equipment repair services, and oilfield parts and supplies.
3) Flotek Industries Inc. (NYSE:FTK)
Flotek Industries Inc. has a Return on Equity of 78.56% and Return on Assets of 15.07% and Current Ratio of 3.92 and Quick Ratio of 2.79. The short interest was 13.32% as of 05/04/2012. Flotek Industries, Inc., together with its subsidiaries, develops and supplies drilling and production related products and services to the energy and mining industries in the United States and internationally. The company operates in three segments: Chemicals, Drilling, and Artificial Lift. The Chemicals segment designs, develops, manufactures, packages, and markets specialty chemicals used by oilfield service companies in oil and natural gas well drilling, cementing, stimulation, and production activities.
4) Akorn, Inc. (NASDAQ:AKRX)
|Industry:||Drugs - Generic|
Akorn, Inc. has a Return on Equity of 35.12% and Return on Assets of 20.57% and Current Ratio of 5.51 and Quick Ratio of 4.26. The short interest was 16.14% as of 05/04/2012. Akorn, Inc. engages in the manufacture and marketing of diagnostic and therapeutic ophthalmic pharmaceuticals products, niche hospital drugs, and injectable pharmaceuticals in the United States and internationally. It offers products in various specialty areas, including ophthalmology, antidotes, anti-infectives, pain management, anesthesia, and vaccines. The company's Ophthalmic segment markets diagnostic products, including mydriatics and cycloplegics, anesthetics, topical stains, gonioscopic solutions, angiography dyes, and others primarily for use in the office setting.
5) Gold Resource Corp (NYSEMKT:GORO)
Gold Resource Corp has a Return on Equity of 85.30% and Return on Assets of 65.93% and Current Ratio of 2.97 and Quick Ratio of 2.83. The short interest was 13.91% as of 05/04/2012. Gold Resource Corporation, an exploration stage company, engages in the exploration for and production of gold and silver in Mexico. It also explores copper, lead, and zinc ores. The company holds a 100% interest in six properties, including the El Aguila Project, the El Rey property, the Las Margaritas property, the Solaga property, the Alta Gracia property, and the El Chamizo property located in southern State of Oaxaca.
6) DepoMed Inc. (NASDAQ:DEPO)
|Industry:||Drug Manufacturers - Other|
DepoMed Inc. has a Return on Equity of 109.63% and Return on Assets of 56.27% and Current Ratio of 2.75 and Quick Ratio of 2.61. The short interest was 6.84% as of 05/04/2012. Depomed, Inc., a specialty pharmaceutical company, develops and commercializes pharmaceutical products for neurology, pain, and other central nervous system conditions and diseases. The company offers Gralise tablet, a once-daily formulation of gabapentin for the management of postherpetic neuralgia; and Glumetza metformin hydrochloride extended release tablet that are used as a once-daily treatment for adults with type 2 diabetes. Its product pipeline also comprises Serada, which completed three Phase III clinical trials for the treatment of menopausal hot flashes; and DM-1992 that is in Phase II clinical trials for the treatment of Parkinson's disease.
*Company profiles were sourced from Finviz.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.