Editor's Note: TheStreet ratings do not represent the views of TheStreet's staff or its contributors. Ratings are established by computer based on metrics for performance (which includes growth, stock performance, efficiency and valuation) and risk (volatility and solvency). Companies with poor cash flow or high debt levels tend to earn lower ratings in our model. NEW YORK ( TheStreet) -- Taomee Holdings (NYSE: TAOM) has been upgraded by TheStreet Ratings from sell to hold. The company's strengths can be seen in multiple areas, such as its revenue growth, largely solid financial position with reasonable debt levels by most measures and reasonable valuation levels. However, as a counter to these strengths, we also find weaknesses including a generally disappointing performance in the stock itself and feeble growth in the company's earnings per share.
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- The revenue growth came in higher than the industry average of 1.8%. Since the same quarter one year prior, revenues rose by 13.1%. This growth in revenue appears to have trickled down to the company's bottom line, improving the earnings per share.
- TAOM has no debt to speak of therefore resulting in a debt-to-equity ratio of zero, which we consider to be a relatively favorable sign. Along with this, the company maintains a quick ratio of 4.69, which clearly demonstrates the ability to cover short-term cash needs.
- When compared to other companies in the Software industry and the overall market, TAOMEE HOLDINGS LTD -ADR's return on equity is below that of both the industry average and the S&P 500.
- TAOMEE HOLDINGS LTD -ADR reported significant earnings per share improvement in the most recent quarter compared to the same quarter a year ago. This company has reported somewhat volatile earnings recently. We feel it is likely to report a decline in earnings in the coming year. During the past fiscal year, TAOMEE HOLDINGS LTD -ADR reported lower earnings of $0.23 versus $0.28 in the prior year. For the next year, the market is expecting a contraction of 34.8% in earnings ($0.15 versus $0.23).
- TAOM's stock share price has done very poorly compared to where it was a year ago: Despite any rallies, the net result is that it is down by 27.60%, which is also worse that the performance of the S&P 500 Index. Investors have so far failed to pay much attention to the earnings improvements the company has managed to achieve over the last quarter. Naturally, the overall market trend is bound to be a significant factor. However, in one sense, the stock's sharp decline last year is a positive for future investors, making it cheaper (in proportion to its earnings over the past year) than most other stocks in its industry. But due to other concerns, we feel the stock is still not a good buy right now.
-- Written by a member of TheStreet Ratings Staff