However, decent growth rarely goes unrecognised by the market. So, valuations tend to be higher for companies with good earnings prospects. But a company’s valuation can be viewed as a mark of quality. And I’d expect to pay more for a business growing its earnings by 50% a year than I’d pay for one growing at 20%.

Software for businesses

One recent purchase I’ve made is Cerillion (LSE: CER). The company provides billing, charging, and customer relationship management software solutions for several industries. Its client sectors include telecommunications, finance, utilities, and transportation. 

In May, the company posted a robust set of half-year results. And chief executive Louis Hall said the directors see “excellent opportunities for continuing growth and [that] the new customer sales pipeline has grown significantly”.

City analysts expect earnings to grow by around 30% in the current trading year to September 2022 and by about 19% the following year. But with the share price near 1,059p, the forward-looking earnings multiple is running at just over 31 for 2023. That’s not cheap and the valuation adds a layer of extra risk for investors. 

But I’m hopeful Cerillion can keep up its operational momentum for years to come. And a recent major contract win announced in July encourages me to believe the signs are good.

Focused on US healthcare

I’m also holding Craneware (LSE: CRW). The UK-based company develops licensing and ongoing support of computer software for the US healthcare industry. 

The company released a strong trading update last week. And chief executive Keith Neilson said he’s looking forward to the future “with confidence”.  

Just over a year ago, Craneware acquired a company called Sentry. The addition increased scale and offering of the business. Neilson said around 40% of all US hospitals now use Cranware’s services.

Meanwhile, City analysts predict growth in earnings of just over 9% in the current trading year to June 2023. And with the share price near 1,730p, the forward-looking price-to-earnings rating is around 22. Not cheap. But I reckon Craneware could be developing some decent operational momentum. Time will tell. But this investment is not without risks.

Payment solutions

Another recent purchase was Equals (LSE: EQLS). It’s a UK-based fintech payments company. It provides small and medium-sized enterprises with a suite of payments products, such as foreign exchange transactions, prepaid card solutions, faster payments, and accounts for receipts and payments. 

In July, the company released a trading update trumpeting “84% growth in revenue and continued strong product uptake”. And chief executive Ian Strafford-Taylor said he believes revenues are “highly inflation-resistant“.

Meanwhile, City analysts predict a meaningful return to positive earnings in 2022 followed by an almost 35% uplift in 2023. Of course, any company can miss its estimates. And one risk is that the business operates in a competitive sector.

However, with the share price near 99p, the forward-looking earnings multiple is around 16 for 2023. And I think that valuation looks fair.

Although there is no guarantee of success, my plan is to hold all three of these stocks for years as the underlying growth stories play out.

The company I’ve been analysing is Equals (LSE: EQLS). It offers a range of products, including international payments, bank accounts and credit facilities, plus multi-currency cards and travel cash. The company pivoted its strategy three years ago to focus on its business-to-business (B2B) solutions. Today, Equals derives the majority of its revenue from its international payments operation.  

Let’s take a look to see if I should buy this penny stock in my portfolio.

The bull case

I’m excited by the growth potential of the FinTech sector. It’s an area that’s expected to grow by over 23% on a compound annual rate between 2021 to 2026. Indeed, Equals is confident of challenging incumbents in the financial services sector. Its ambition is to become the leading payments company of choice for small and medium-sized enterprises, which I view as a huge potential growth avenue for Equals.

The company is also performing well right now. In a trading update released on 8 December, Equals said it has significantly exceeded full-year expectations for both revenue and adjusted EBITDA (earnings before interest, tax, depreciation and amortisation). This is exactly what I want to hear as a potential investor. A significant international payments transaction for a large corporate client played an important role in the outperformance. This shows to me that the company’s strategy is working well.

The bear case

Although the share price has had a strong run in 2021, and is up a huge 128% as I write, it remains under the all-time high it reached in 2018 of 150p. In fact, the share price crashed by an eye-watering 85% from this high when it reached a low during the Covid sell-off in spring 2020. This kind of volatility is always something to keep in mind when investing in a penny stock.

Equals has been loss-making in its last two financial years. Investing in companies that don’t make a profit is always riskier as any downturn in trading may lead to significant financial distress.

Finally, the FinTech sector is highly competitive. That’s generally the case when a disruptive sector is growing at pace as it attracts new and ambitious companies to the market. I wrote about Wise recently, which operates in this sector. There’s a risk that Equals may have to reduce its prices to remain competitive in its main international payments business in order to remain competitive.

Is this penny stock a buy?

Taking everything into account, I do like the investment case here. The general growth in the FinTech sector acts as a tailwind for Equals. The pivot towards its B2B solutions has proved successful so far too. The valuation isn’t particularly demanding either as the price-to-earnings ratio for next year is currently 19.

I’m strongly considering this penny stock for my portfolio.