Everyone wants to find the next best growth share on the ASX.
Obviously it's very hard to know which one is going to do very well in the future, but there are some factors that could help us pick out which ones are going to do well.
These are three of the main things I'd want to look out for in a growth share:
Market-leading product
If a business has the best product in the market it could be described as having a moat in terms of its brand or product, with potential customers most likely to choose them if all other things (such as price) are equal.
However, unless we are a user ourselves of the product, it's hard to know if the business has a market-leading product, so all we can do is the best research we can to see if it's well-respected in the industry.
For example, REA Group Limited (ASX: REA) quite proudly states that it gets far more views and viewing time per user than Domain Holdings Australia Limited (ASX: DHG), which says it has a market-leading offering for people.
Other businesses like Altium Limited (ASX: ALU) have stated aims of becoming the most used and respected player in their industry.
High levels of repeat business with high margins
If a company generates high levels of repeat business then it has a good advantage against competitors because it's harder to lose customers.
For example, Xero Limited (ASX: XRO) has very high levels of recurring revenue, meaning it doesn't have to spend a lot on marketing to maintain the same level of revenue. As a bonus, if that repeat business is earned with high profit margins then there's a lot of profit flowing through the business year after year, even if it's not attracting many new customers.
Strong balance sheet
A business only comes under severe stress if its balance sheet is stretched with too much debt or too many other liabilities.
Ideally any growth share that you might choose has a net cash position, or perhaps no debt at all, so that it doesn't face this issue. Two of the most attractive growth shares on the ASX also have very good cash positions, being Altium and Pro Medicus Limited (ASX: PME).
Foolish takeaway
Whilst all of the above factors are very important, buying at a good valuation is one of the most important things of all.
If you could go back in time by five years and just invest in Altium, REA Group, Pro Medicus and Xero your portfolio would have done exceptionally well. But I'm not sure any of them are very good value today.
