With global interest rates being so low, I think it's very important to only invest in the best growth shares if you're going to pay these high prices. I think Altium Limited (ASX: ALU) is one of the best growth shares on the ASX.
Here are three reasons why I think Altium could be the best ASX growth share:
Excellent balance sheet
There are plenty of businesses on the ASX that don't have much cash, or have too much debt on their balance sheets. There's a smaller group that have a net cash position, being more cash than debt.
But there's only a small group of quality businesses that don't have any debt, but they have plenty of cash on the balance sheet. Debt is one of the main things that can cause a business to become unstuck. At June 2019 Altium had no debt and US$80.5 million of cash (up 54% over the year) and had operating cash flow of US$69.1 million (up 42%).
Altium also has one of the best accounting policies when it comes to its software development, it expenses more of its R&D than most other tech businesses, which lowers the accounting profit.
Strong economics
One of the things you want to see from an expanding tech business is increasing profit margins. Some tech shares don't even make a profit, so Altium is already one step ahead here with a net profit of US$52.9 million in FY19.
But in FY19 its earnings before interest, tax, depreciation and amortisation (EBITDA) margin increased to 36.5% from 32% in FY18, which is why EBITDA was able to grow by 40% but revenue only grew by 23%.
Altium thinks the EBITDA margin could go even higher over the coming years, perhaps the EBITDA margin could go as high as 40% (or even higher) over the long-term.
It's the strong economics that allow Altium to maintain such a good cash position and continually grow the dividend payment to shareholders consistently. In FY19 the dividend was increased by 26% to $0.34 per share.
Big growth targets
If we're going to pay a seemingly high price for a growing business, we want to know there's plenty of growth left. Altium is targeting 100,000 Altium Designer seats over the next few years, which it thinks will lead to it becoming the clear global market leader in the electronic PCB space. It expects to reach halfway of 50,000 in 2020.
It's also targeting US$500 million revenue by 2025, don't forget its revenue was US$171.8 million in FY19.
Foolish takeaway
Altium is trading at 39x FY21's estimated earnings with a dividend yield of 1%. It's certainly not cheap, but I think it's very well positioned for future growth and looks a fair bit cheaper than quite a few other tech growth shares on the ASX.
