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Apr
30
Small caps with revenues growing quicker than expenses reward investors
Posted by: Gerry Wimmer
4/30/2017
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Revenue growth and EBITDA margin trends are good indicators to future profitability for Investorfile Top Ideas: Quorum Information Technologies (TSXV: QIS), Avante Logixx (TSXV: XX) & Sangoma Technologies (TSXV: STC).

One of Investorfile’s favourite predictors for a small cap company’s share price appreciation is a growing EBITDA margin. EBITDA margin is a measurement of a company’s operating profitability as a percentage of its total revenue. It is equal to earnings before interest, tax, depreciation and amortization (EBITDA) divided by total revenue. When EDITDA margins are on the rise, it simply implies that a company’s revenues are growing at a faster rate than its expenses.

Because EBITDA margin is a measurement of a company's operating profitability as a percentage of its total revenue, we feel it provides small cap investors with a clearer view of a company's financial prospects. The higher the EBITDA margin, the smaller a company’s operating expenses in relation to total revenue, thus increasing its bottom line and leading to more cash-flow.

Generally speaking, when EBITDA margins grow to over 10% of revenues, there tends to be a more noticeable and positive impact on a small cap company’s earnings per share (assuming no addition stock dilution) which can lead to a significant increase in the company’s stock price.

For this blog post we took a survey of our Top Ideas to identify which companies have grown their revenues the fastest over the past 12 months in conjunction with strong and/or rising EBITDA margins. From this exercise we recognize the following three Investorfile small cap stocks:

  1. Quorum Information Technologies (TSXV: QIS – C$0.80)
    Trailing 12-month revenue (TTM) growth: 13%
    TTM EBITDA margins: 16%
    See: Quorum blog posts

  2. Avante Logixx (TSXV: XX - C$0.29)
    TTM revenue growth: 42%
    TTM EBITDA margins: 12%
    See: Avante blog posts

  3. Sangoma Technologies (TSXV: STC – C$0.67)
    TTM revenue growth: 17%
    TTM EBITDA margins: 8% (Last quarter: 11.5%)
    See: Sangoma blog posts
Based on positive revenue growth and EBITDA margin trends occurring at Quorum Information Technologies, Avante Logixx and Sangoma Technologies,we believe this a good indicator of future profit growth and stock price appreciation for these Investorfile stocks.

Author's ownership disclosure -YES: QIS, XX, STC


Read Disclaimer:

This article is for informational purposes only. This article is based on the author's independent analysis and judgment and does not guarantee the information's accuracy or completeness. The information contained in this article is subject to change without notice, and the author assumes no responsibility to update the information contained in this article. The information contained within this article should not be construed as offering of investment advice. Those seeking direct investment advice, should consult a qualified, registered, investment professional. This is not a direct or implied solicitation to buy or sell securities. Readers are advised to conduct their own due diligence prior to considering buying or selling any stock.

Investorfile is not engaged in an investor relations agreement with Quorum Information Technologies Inc., Avante Logixx Inc., and Sangoma Technologies Corp. for the preparation or distribution of this article.

The author of this article has acquired and may trade shares of Quorum Information Technologies Inc., Avante Logixx Inc., and Sangoma Technologies Corp. through open market transactions and for investment purposes only.

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Gerry: Thanks for small cap stock suggestions over the past 5-years. Your record is very impressive and your analysis has been excellent over the years. I think small investors (and fund managers) should pay much more attention to your work. I look forward reading your blog over the next 5-years!