Altium Limited (ASX: ALU) is one of the best businesses on the ASX in my opinion.
But, one of the main things that people say about Altium is that it is too expensive. It's true, it certainly isn't cheap at 58x FY19's earnings.
However, I think it could still be a buy for these three reasons:
Free cash flow
In FY19 the company generated US$63.9 million of free cash flow compared to net profit after tax (NPAT) of US$52.9 million. In FY18 it generated free cashflow of US$44.9 million compared to NPAT of US$37.5 million.
If you value Altium against its free cash flow it doesn't look quite as expensive, particularly when you value other growth shares against their free cashflow rather than their reported earnings.
I think this metric always shows how wonderfully profitable Altium is. It's also building a large cash pile. During FY19 it added almost US$30 million to its cash balance to end at US$80.5 million.
Strong growth
If one business grows profit by 3% a year and the other grows by 25% a year it's obvious you'd pay more for the faster growing business.
Altium grew its NPAT by 41% during FY19, it grew 33% in FY18 and it grew 22% in FY17. Not only is Altium growing quickly but it's accelerating.
I'm certainly not expecting growth of 33% or more every year for the next decade, but the company expects to grow revenue to US$500 million by 2025 thanks to the rapid growth of the Internet of Things, so there could be a lot more profit growth to come.
Worth paying for quality
Australian interest rates have been pushed down by the RBA to a record low of 0.75%. All assets are priced higher when interest rates are low, particularly really good ones.
In this environment I think Altium is worth its high price, although it would have been better to buy shares earlier in the month when the share price was under $32.
Foolish takeaway
Altium is trading at 40x FY21's estimated earnings. I think this is just about the most I'd want to pay for Altium shares, but I think it can go on to quite handily beat the market over the next few years.
