Here’s why cash flow and contribution margin are important parameters for new-age tech companies like Paytm | The Financial Express

Here’s why cash flow and contribution margin are important parameters for new-age tech companies like Paytm

Simply put, new-age technology companies are scaling their future-ready businesses at breathtaking paces and even though they are going through a period of loss-making, they have successfully created a valuable ecosystem that guarantees profitability in the future.

Here’s why cash flow and contribution margin are important parameters for new-age tech companies like Paytm
Most new-age technology companies and startups are working towards a behavioral change and hence make investments towards creating an ecosystem before they can target profitability.

Over the past year, several Indian new-age technology companies have made their debut on the domestic stock market and have garnered mixed responses among investors and financial experts. Given the technology-led world we live in, investors believe that a number of these new-age companies have the potential to become multi-bagger stocks in the future.

One worry for most old-school or traditional investors is the fact that most of these new-age technology companies have high losses on their balance sheets. But does a period of initial losses accurately represent such companies’ growth potential or valuation?

The simple answer is no. For instance, global e-commerce giant Amazon would not have become the behemoth it is today if its investors had valued the company on its initial stock market failures, nor would they have the many other tech cos from across the world yet to show a profit on their balance sheet.

Most new-age technology companies and startups are working towards a behavioral change and hence make investments towards creating an ecosystem before they can target profitability.

Once the ecosystem is in place, the company’s profitability journey keeps accelerating with a higher contribution margin (profitable revenue) and cash flow.

Investors need to note that new-age technology companies face multiple challenges amidst a highly-competitive environment, and it takes patience and sustained focus to create value, similar to what Paytm achieved as the pioneer of India’s mobile and QR payments revolution. While the fintech major is yet to report a profit, it has been witnessing a rapid increase in its contribution margin and revenue – paving the way for it to achieve operating profitability.

As these companies increase their scale of operations over time, they witness accelerated loss reduction, and substantially higher revenue growth. Even top brokerages remain optimistic about new-age technology companies, given their growth trend and demonstrable revenue-bearing businesses.

Simply put, new-age technology companies are scaling their future-ready businesses at breathtaking paces and even though they are going through a period of loss-making, they have successfully created a valuable ecosystem that guarantees profitability in the future. It is high time that the investor fraternity should ditch traditional valuation parameters for evaluating new-age companies and relied upon scalability, cash flow, and contribution margin.

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First published on: 02-11-2022 at 23:29 IST