I believe that Altium Limited (ASX: ALU) is one of the best growth shares on the ASX.
It's an electronic PCB software business which has been operating for quite a long time, but it's been this decade under the leadership of Aram Mirkazemi that the company has really taken off whilst benefiting from the boom of the Internet of Things.
Altium has been focused on its long-term goals and is on track to surpass its 2020 goal of US$200 million which was set several years ago. I think Altium is a great ASX growth share for at least three reasons:
2025 goals
Altium has set another long-term goal of US$500 million revenue by 2025, so that's going to be another US$300 million of revenue over the next five and a half years, more than doubling. This growth, if achieved, would be impressive and deliver pleasing profit growth.
One of the main ways that Altium plans to meet that goal is by aiming for 100,000 Altium Designer subscribers. Altium wants to become the clear global leader of the electronic PCB software world in the same way that Microsoft dominated the Office software space.
Rising profit margins
Not only is Altium predicting that revenue can grow strongly, but the software business' profit margins keep rising as it gets bigger. Software is an infinitely replicable product, there's almost no cost for it to be re-created, unlike a car, phone, or physical products – that's why Altium can keep growing margins higher and higher.
In FY19 Altium grew its earnings before interest, tax, depreciation and amortisation (EBITDA) margin from 32% to 36.5%. In the longer-term Altium thinks the margin could reach 40% or even higher.
A business that is growing revenue rapidly and also increasing its profit margins should see net profit increase fast and that should also lead to a growing share price.
Excellent balance sheet
Altium has one of the most attractive balance sheets on the ASX in my opinion. It has no debt, it has excellent free cash flow leading to a growing cash balance on the balance sheet and it has a very good expense policy – some software businesses capitalise a large portion of their research & development expenses and inflate profits, whereas Altium doesn't do that.
With this financial strength Altium should be able to weather financial downturns, make bolt-on acquisitions and pay increasing dividends.
Foolish takeaway
Altium is trading at just over 41x FY21's estimated earnings. It's probably a bit expensive to buy a large position today, but I'd be willing to make a small buy of Altium today at this valuation.
