I believe that Altium Limited (ASX: ALU) is one of the best growth shares on the ASX.
There are a number of different things that investors look for when searching for which ASX growth shares to buy. These are four of the reasons why I think Altium is a great ASX growth share:
Earnings growth rate
Altium has been one of the best growth shares over the past decade. This has been driven by strong earnings growth.
In FY19 alone Altium reported earnings per share (EPS) growth of 41% to US$0.406 per share. There has been a large increase since FY16 when EPS was US$0.179. When you focus on the longer-term growth trends you can see how much progress the company has already made.
One of the most important things for a company is (sustainable) profit growth. Revenue growth is important, all those other financial metrics are important, but the 'bottom line' is very important.
Cashflow
Arguably cashflow is the most important thing. Accounting profits can be impacted by various things, but cashflow is a better sign of profitability.
Altium has seen its free cashflow grow from US$11.1 million in FY16, to US$31 million in FY17, to US$44.9 million in FY18 and to US$63.9 million in FY19.
It's rare to find a business on the ASX that generates free cashflow so much higher than the net profit. That's because Altium has one of the best accounting policies in regards to its depreciation.
Balance sheet
Having a strong balance sheet is attractive in good times and particularly bad times. Altium is debt free and as I mentioned above, it generates excellent free cashflow so the cash balance is always rising. During FY19 the cash balance rose from US$52.5 million to US$80.5 million.
A good balance sheet means it can make bolt-on acquisitions. It also means that in a downturn Altium would be very unlikely to need to do a dilutive capital raising at a beaten-down share price.
Management
One of the most important factors of a great long-term business is the management. They are the captains of the ship and the stewards of our capital.
Aram Mirkazemi might be one of the best CEOs on the ASX. He has already executed on the long-term vision set out years ago and now he wants to make Altium the leading electronic PCB software business in the world whilst growing profit margins, growing dividends, maintaining a good balance sheet and so on.
Foolish takeaway
Altium is a fantastic business, but it's now trading at 43x FY21's estimated earnings. Even with interest rates so low, I think I'd only want to invest in more Altium shares at least 10% lower than today's valuation. Altium has a great long-term future.
