Net Element, Inc., a global payments-as-a-service company, operates as a technology provider with an integrated mobile and transactional services platform serving emerging market clients. It operates through North America Transaction Solutions, Mobile Solutions, and Online Solutions segments. The North America Transaction Solutions segment provides technology and services for businesses require to accept cashless transaction for retail card-present, e-commerce, or card-not-present mail order/telephone order transactions, as well as offers mobile payment services, merchant performance analytical tools, merchant back office reporting, and cloud-based Aptito, a point of sale (POS) platform, which includes hospitality, mobile POS, and small to medium sized business retail POS applications. The Mobile Solutions segment provides an integrated mobile billing and mobile commerce solution for digital merchants, such as social networks, game developers, online magazines, mobile applications, and digital media operators to monetize their content in a mobile environment. It also offers various mobile payment solutions for Web services and mobile applications. This segment provides mobile users to pay for purchases via mobile device, interactive device, or Web without a credit card or a bank account. The Online Solutions segment operates PayOnline that provide a range of value-added solutions utilizing its integrated platform agnostic electronic commerce that simplifies enterprise online transaction processing challenges from payment acceptance and processing through risk prevention, and payment security via point-to-point encryption and tokenization solutions. It operates in North America, Russia, and Commonwealth of Independent States. The company was formerly known as Net Element International, Inc. and changed its name to Net Element, Inc. in December 2013. Net Element, Inc. was founded in 2004 and is headquartered in North Miami Beach, Florida.
FINANCIAL RATIOS of Net Element (NETE)
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NETE stock valuation input parameters
Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the NETE stock intrinsic value calculation we used $60.064824 million for the last fiscal year's total revenue generated by Net Element. The default revenue input number comes from 0001 income statement of Net Element. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.
Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
We use three input parameters to forecast the revenue growth rate in our NETE stock valuation model: a) initial revenue growth rate of 17.8% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.
Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
The initial discount rate of 4.3%, whose default value for NETE is calculated based on our internal credit rating of Net Element, is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of Net Element.
By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.
Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of NETE stock the variable cost ratio is equal to 96.7%.
Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $10 million in the base year in the intrinsic value calculation for NETE stock. These expenses increase with the level of inflation in subsequent years.
Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 20.8% for Net Element.
Corporate tax rate of 27% is the nominal tax rate for Net Element. In reality, companies find ways to pay much less taxes than that or not to pay them at all.
Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the NETE stock is equal to 0%.
Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for NETE are equal to 11%.
Life of production assets of 5.2 years is the average useful life of capital assets used in Net Element operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.
Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for NETE is equal to -7.4%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.
Book value of equity - $13.182714 million for Net Element - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.
Shares outstanding of 3.856 million for Net Element is needed to calculate the intrinsic value of one share.
Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of Net Element at the current share price and the inputted number of shares is $0.0 billion.