Igor

Financial Advisor

The Fintech Industry Seeks for a Higher Growth Rate

According to Investopedia:
“Growth rates refer to the percentage change of a specific variable within a specific time period and given a certain context. For investors, growth rates typically represent the compounded annualized rate of growth of a company's revenues, earnings, dividends or even macro concepts such as gross domestic product (GDP) and retail sales.”
One way to determine the value of a business is to use the formula
for the present value of perpetual annuity: Present Value of Ordinary Perpetuity = Constant annual return/Discount rate
This formula can be slightly modified to include a growth in annual returns: Firm Value = Initial Annual Return/(Discount Rate − Growth Rate of Initial Return)
In simple terms, a growth rate is a measure of how fast a company is growing, not growing, or achieving its goals. It is the essential indicator
of any kind of business (it could be even a non-profit organization or a
ministry) well-being. The only reason a company would be discouraged from calculating this rate is if they are happy with the status quo or just don’t care anymore.
A growth rate can report you if business is slowing down before you get into the red. If a growth rate starts decreasing, you know that even though you may be growing, you are slowing down for some reason.
«In short, the key to value is profitability. If you’ve got it, flaunt it. If you haven’t got it, try to get it. If you can’t get it, get out.
According to a research provided by McKensey:
“Growth trumps all.       
  1. First, growth yields greater returns. High-growth companies offer a return to shareholders five times greater than medium-growth companies do.
  2. Second, growth predicts long-term success. “Supergrowers”—companies whose growth was greater than 60 percent when they reached $100 million in revenues—were eight times more likely to reach $1 billion in revenues than those growing less than 20 percent.
  3. Additionally, growth matters more than margin or cost structure. Increases in revenue growth rates drive twice as much market-capitalization gain as margin improvements for companies with less than $4 billion in revenues.”
The above notwithstanding, in case of Fintech sector, fast growth can be dangerous. It would therefore be advisable to opt for smart and sustainable growth. Fast and uncontrollable growth can lead to negative
effects that will “demolish” the company and destroy long-term value.
Fintech is growing like crazy all over the world and among the vast majority of industries. It could grow even faster but in that case, it would be difficult
to optimize. It is important to get things right.
First, elaborate the product, and then get a license in order to become a legal player in the market and finally offer your product to potential consumers.
Otherwise, your company will be screwed like Square, the mobile payments company, which was hit with a hefty fine in Florida for operating without a money transmission license.
In case of Fintech, lending business smart approach is the unique
way to survive and outperform the market. A company can get thousands of clients but you want to make sure most of the money you are lending actually comes back. We have already experienced Lehman Brother’s crack in 2008 and, hopefully, learned something from it: make sure that borrower returns funds on time.

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