ASX small caps have the potential to deliver the biggest returns for investors because of how much profit growth can create.
It's much easier doubling $10 million profit into $20 million than it is to turn $1 billion of profit into $2 billion.
The most important thing we're trying to achieve with our portfolio is investment returns. It's best to invest for the long-term, but it's useful if we can find the shares that are going to give us good returns sooner rather than later.
Small caps that are turning the corner from burning cash to creating net profit could be attractive as the market realises how quickly profit could grow in the next few years.
These are two ASX small cap shares I think could be strong performers over the next two years:
Pushpay Holdings Ltd (ASX: PPH)
Pushpay is a religious donation payments business which predominately services large and medium churches in the US.
Today the company announced its interim FY20 result which included revenue growth of 30% to US$57.4 million and net profit growth of 247% to US$6.5 million as well as operating cash flow growth of 274% to US$8.9 million.
If costs continue to grow far slower than revenue we could see the profit grow at a much quicker pace than revenue for the foreseeable future.
With the Pushpay share price lower than it has been over the past two years, I think today could be a good time to buy shares with net profit likely to significantly jump over the next two to three years.
Redbubble Ltd (ASX: RBL)
Redbubble owns two online marketplace businesses for independent artists to sell products like clothing, wall art and so on.
The company has also seemingly hit a tipping point. In the first quarter of FY20 the online business generated marketplace revenue growth of 43% to $70 million and gross profit growth of 48% to $27 million.
Perhaps most importantly, Redbubble generated an earnings before interest, tax, depreciation and amortisation (EBITDA) profit of $2.2 million (an improvement of $4 million from the $1.8 million loss in the prior year) and it also created free cash flow of $7.8 million.
The company's share price is only just back to the 2018 highs and could keep going higher as more revenue falls to the bottom line.
Foolish takeaway
Both businesses look like they could be strong performers into 2020. I'd probably choose Pushpay because it appears to have less competition, less reliance on marketing and good repeat business compared to Redbubble.
