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What are we looking for?

North American software and information technology services companies that rank top amongst their peers when judged across key industry metrics.

The screen

The software and IT services industry is one of the fastest growing segments of the market and is home to both stories of success and failure across constituent companies.

Many profitable companies within this industry exhibit a particular set of common characteristics, which can be measured across a few key industry ratios. Companies included within the screen must trade on a North American exchange, have a market cap of at least $1-billion, (U.S.), and be a constituent of the Thomson Reuters Business Classification (TRBC) software and IT services industry group.

Companies included must have a capital reinvestment ratio of at least 15 per cent. This metric indicates the portion of common shareholder's equity kept as retained earnings on the balance sheet over the last fiscal year.

Next, an indicator of liquidity is shown in the current ratio, highlighting a company's ability to meet short-term obligations by measuring current assets against current liabilities; a ratio of at least 1.5 is needed.

Companies must have a total debt to total equity ratio less than 50 per cent, highlighting the screen's allowable threshold of debt as percentage of the company's overall capital structure.

Lastly, the gross profit margin is presented as a profitability metric highlighting the percentage that gross profit (sales less cost of goods sold) makes up of overall sales, with a higher value preferred. A minimum gross profit margin of 50 per cent is required of companies shown in the results.

None of the companies we screened pay a dividend as they are focused on investing capital back into the business.

More about Thomson Reuters

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What did we find?

Ranked by market cap, 14 companies made the screen results with a few household names topping the list. Gaming giant Electronic Arts Inc. known by many as the creator of the Madden NFL and FIFA video game franchises, scored strong results across the board and highlights all of the aforementioned characteristics that are common of a successful company within the software and IT services space.

This commentary does not provide individualized advice or recommendations for any specific subscriber or portfolio. Investors should conduct further research before investing.

Ryan Gottschalk, CFA, is an asset management specialist at Thomson Reuters.

Top North American tech firms

CompanyTickerTRBC Activity NameMarket Cap ($Mil U.S.)Recent Price ($ U.S.)Reinvestment RateCurrent RatioD/E RatioGross Profit Margin
Alphabet Inc.GOOGL-QSearch Engines665,402.3169.4715.0%6.292.8%62.4%
Facebook Inc.FB-QSocial Media & Networking492,174.242.9019.7%11.970.0%87.5%
Alibaba Group Holding Ltd.BABA-NE-commerce & Auction Services444,641.9173.6117.6%1.9532.6%64.9%
Adobe Systems Inc.ADBE-QApplication Software72,926.057.2716.2%2.0825.5%86.0%
Electronic Arts Inc.EA-QApplication Software36,414.4100.3925.9%2.1524.4%76.2%
NetEase Inc.NTES-QIT Services & Consulting 35,216.831.9134.4%2.5610.0%56.7%
Weibo Corp.WB-QOnline Services 21,949.1147.9415.7%2.150.0%74.3%
Check Point Software TechnologiesCHKP-QApplication Software19,122.0123.7220.6%1.620.0%88.7%
F5 Networks Inc.FFIV-QIT Services & Consulting 7,862.043.2029.2%1.530.0%84.6%
Autohome Inc.ATHM-NOnline Services 6,603.1115.2121.9%2.920.5%59.9%
Momo Inc.MOMO-OTCMobile Application Software6,314.4117.9526.4%5.390.0%56.4%
Manhattan Associates Inc.MANH-QIT Services & Consulting 2,977.6967.4768.1%1.760.0%59.3%
Gigamon Inc.GIMO-NSoftware 1,605.3266.5923.7%3.260.0%83.0%
MicroStrategy Inc.MSTR-QEnterprise Software1,477.3129.0618.0%3.690.0%81.8%

Source: Thomson Reuters Eikon