June 27 is the United Nations Day for Micro, Small, and Medium-Sized Enterprises.

As investment promotion professionals who interact with businesses every day, today we’d like to talk about the ins and outs of small and medium-sized enterprises (SMEs) and micro-enterprises…

Introduction

Why do some SMEs show such a significant gap in development compared to others just three to five years after being established?

The root cause lies in the word “potential.”

When dealing with large-scale projects, investment promoters tend to focus more on scale and investment volume. However, for SMEs, what matters most is the company’s future growth potential.

Whether a company has potential is not necessarily linked to its current profits, but rather is closely tied to its growth potential. This has likely been proven countless times through the observations and experiences of investment promoters over the years.

So, what common characteristics do companies with high potential and strong growth prospects share?

Data Demonstrates Strength

In the past, investment promotion was primarily about attracting companies to invest in a region. Today, with the rise of capital and fund-based investment promotion models, it has gradually evolved into a two-way investment between local governments and enterprises.

There is a saying in the investment world: “Investing in a company means investing in people,” emphasizing the importance of entrepreneurs to a company’s future development.

While people are undoubtedly important, as professional investment promoters, we must look beyond the surface to understand a company’s true nature by examining its actual financial condition.

To assess a company’s growth potential, one can start by examining metrics such as the growth rates of operating cash flow, net profit, sales revenue, net assets, and total assets.

Generally speaking, if these indicators are positive, it indicates that the company’s growth potential is continuously improving.

Operating Cash Flow Growth Rate = Net Increase in Cash Flow for the Current Year / Net Operating Cash Flow for the Previous Year × 100%

Cash flow is a critical issue that affects a company’s lifeline; it dynamically reflects the company’s financial condition. At the same time, given the relatively high development pressures today, sufficient cash flow indicates that the company is operating well and has a strong ability to withstand risks.

There was once a company that generated 7 billion yuan in operating cash flow over ten years, but incurred 8 billion yuan in capital expenditures, resulting in a net cash outflow of 1 billion yuan. It could be described as “working hard for over a decade, only to look back and realize it was all for nothing.”

Net Profit Growth Rate = (Net Profit Increase for the Current Year / Net Profit for the Previous Year) × 100%

Net profit growth rate reflects the increase or decrease compared to the previous year. A higher rate indicates stronger profitability and greater growth potential.

Revenue Growth Rate = Current Year Revenue Increase / Previous Year Revenue × 100%

Revenue is the foundation of a company’s survival; the Fortune 500 is primarily ranked by revenue.

If the indicator is >0, a higher value indicates a brighter future for the company; conversely, if the indicator is <0, the company may face issues regarding product quality, grade, or pricing.

Net Assets Growth Rate = (Net Assets Increase for the Current Year / Net Assets at the Beginning of the Year) × 100%

A rapid growth rate in net assets is a sign of a company’s robust development and serves as the source for expanded reproduction. The higher this value, the greater the company’s capital accumulation, which in turn enhances its ability to manage risks and sustain long-term growth.

Total Assets Growth Rate = (Net Increase in Total Assets for the Current Year / Total Assets at the Beginning of the Year) × 100%

A higher total asset growth rate indicates that the company’s asset management scale is expanding more rapidly within a single operating cycle.

The five metrics mentioned above are all key indicators for assessing a company’s growth potential. Investment professionals can use them to conduct targeted analyses of the projects they are currently evaluating.

Additionally, these five indicators can be compared in combination. If the growth rate of operating cash flow > net profit growth rate > revenue growth rate > net asset growth rate > total asset growth rate, then the quality of the company’s growth is relatively high.

Distance from the "Ceiling"

The core business of small and medium-sized enterprises (SMEs) is often concentrated in a specific industry segment. Therefore, the market size and competitive landscape of the industry in which the company operates are key factors in assessing its growth potential.

A company’s growth potential, put simply, is the distance between the company and the industry’s “ceiling.” This represents the theoretical maximum of the company’s growth potential. Generally, the smaller the company, the easier it is for it to achieve high growth rates.

Industry development is often described using the concepts of “red oceans” and “blue oceans” to characterize the industry lifecycle.

A “blue ocean” refers to a stage where the industry’s capacity is continuously expanding; in a blue ocean, companies are more likely to enjoy high growth alongside the industry. A “red ocean,” on the other hand, is the opposite of a blue ocean; when an industry is in a red ocean phase, it is often difficult for companies to achieve high growth.

Assessing an industry’s growth prospects depends not on its size or age, but on genuine market demand.

For investment promoters, a region usually has only a handful of dominant industries. If you want to verify whether a project acquired through industrial chain investment is suitable for the region, the most intuitive way is to communicate with local enterprises to analyze and understand their needs.

In summary, whether a company can grow rapidly after establishing operations in a region depends not on what’s written in textbooks or recorded in corporate ledgers, but on what’s found in the community—specifically, in the “streets and alleys” of local businesses.

If a company operates in an industry’s “blue ocean” and aligns with local needs, it is, without a doubt, a “high-potential prospect.”

Investing is about investing in people

For investment promoters, signing a project agreement without having met the company’s founder (or actual controller, major shareholder) is like getting a marriage certificate without ever seeing the bride.

Since investing in a company means investing in people, what kind of people should one invest in, and how should one judge them?

The saying “Investing is investing in people” has its limits. When dealing with a company like Kweichow Moutai, replacing a general manager or chairman has minimal impact. But if the company is a private enterprise, if the founder runs into trouble, the entire business could collapse.

The vision and ambition of a private enterprise’s founder essentially determine the company’s “ceiling.”

Take Dangdang and JD.com as examples. When Dangdang was starting out, its size, scale, and profitability clearly outshone JD.com’s. However, because the development philosophies of Dangdang’s founders, Yu Yu and Li Guoqing, differed vastly from those of Liu Qiangdong, Dangdang’s trajectory gradually diverged from JD.com’s.

How should one assess a person? Key factors to consider include age, educational background, personality, aspirations, professional experience, and skill preferences. Of course, the team is also an important consideration.

At the same time, analyzing the founder and the team can also assist investment professionals in matching talent to the company at a later stage.

If the founder is a technical expert, the team needs sales professionals; if the founder is sales-oriented, the company needs to bring in technical staff... and so on.

Innovation Is the Main Theme

Innovation has been the central theme of corporate development in recent years. How do business development professionals determine whether a company is innovative?

In fact, innovative SMEs are not limited to emerging industries; innovative companies emerge in every sector.

First, one can assess whether the target company has product innovation.

For example, consider a company whose product is the ubiquitous threaded track spike. Yet, this company has achieved a qualitative leap in the product’s quality. Beyond meeting all technical specifications, the product has achieved a certain degree of import substitution and has also led to breakthroughs in international fastener material research and product strength. In this case, the company can equally be called an innovative enterprise.

Second is technological innovation. For instance, by automating and intelligently upgrading key production processes and establishing advanced production information management systems, companies can improve production efficiency, quality, and performance metrics.

Beyond that, there is business model innovation. For instance, enhancing product design capabilities to meet customers’ customized and differentiated needs, addressing the pain points of fragmented procurement, and strengthening customer loyalty and interdependence.

Additionally, certain data metrics can assist investors in assessing a company’s innovation capabilities.

Conclusion

During the investment promotion process, placing too much emphasis on a company’s scale can lead to overlooking “hidden gems,” but focusing excessively on growth potential can easily lead investment promoters to pursue concept-driven companies, companies with grand blueprints, or companies that are all talk and no action…

If expectations can be balanced—focusing on companies with excellent management, a down-to-earth approach, meticulous attention to detail, and a lack of hype—these “model” enterprises may offer local governments and investment promoters unexpected “surprises.”