A low stock price to sales ratio in conjunction with EBITDA momentum identify Sangoma Technologies (TSXV: STC) and AirIQ (TSXV: IQ) as great stock buys.

The Investorfile blog has a laundry list of measures that provide the framework for our investment process which help identify our small cap value Top Ideas. Although, together, two items rank very high on our list of value indicators: a low stock price to sales ratio and EBITDA momentum. If a public company exhibits both of these simultaneously, the stock becomes a great investment opportunity.

Investorfile calculates the price-to-sales ratio (P/S) by taking a public company's market capitalization (the number of outstanding shares multiplied by the share price) then divide it by the company's annual revenue run rate going forward. If the P/S ratio equals one (or less), the Company’s total market value is equivalent to only one year of its total sales. Companies that have some recurring sales streams and a diversified customer base are high quality.

One of Investorfile’s favourite indicators for a small cap company’s share price appreciation potential is EBITDA momentum. When EBITDA (earnings before interest, taxes, depreciation and amortization) is growing and has momentum, the company’s operations are generally thriving.

An even better indicator is EBITDA "margin”momentum, which is a measurement of a company’s operating profitability as a percentage of its total revenue. When EBITDA margins are on the rise, it 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 growth investors with a clearer view of a company's future 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 stronger cash flow.

For this blog post, we took a survey of our Top Ideas to identify which companies are trading at a P/S ratio (based on their current revenue run rate) equal to one or less in conjunction with reporting EBITDA momentum over the past several quarters. From this exercise we identify two of Investorfile’s stock picks:

Sangoma Technologies (TSXV: STC – C$1.43)
P/S ratio: 0.81 (based on C$120 million annual revenue run rate)
Recurring sale streams: YES
EBITDA momentum: YES
See: Sangoma blog posts

AirIQ (TSXV: IQ – C$0.185)
P/S ratio: 0.79 (based on C$7 million annual revenue run rate)
Recurring sales streams: YES
EBITDA momentum: YES
See: AirIQ blog posts

Based on their current P/S ratios (and the quality of revenue streams) coupled with the EBITDA momentum reported at Sangoma Technologies and AirIQ,we believe there is strong stock price appreciation potential in the near term for both of these Investorfile stock picks.

Note: Both companies maintain strong balance sheets.

Author's ownership disclosure -YES: STC, IQ

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 AirIQ 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 AirIQ Inc., and Sangoma Technologies Corp. through open market transactions and for investment purposes only.