Investors chasing long-term security generally look towards blue-chip ASX 200 shares. However, if you want to build wealth for life, then you need to look at companies with a lot of growth ahead of them.
If a share price is to grow by 10 times the initial investment, it needs to compound at a rate of at least 30% per year for 10 years. At the least this requires access to markets, good management, and the free cashflow to fund future growth.
Growth share examples
Over the past decade, most of the ASX shares that grew more than 10 times the initial investment shared a high growth rate in free cashflow. Altium Limited (ASX: ALU) achieved an average share price growth of 65% every year for 10 years. Jumbo Interactive Ltd (ASX: JIN) grew its share price by an average of 40% each year for 10 years.
Both of these fantastic ASX shares had very high annual growth rates in free cashflow.
Building wealth for life
These 2 ASX 200 shares are growing their free cashflow at very high rates every year. They are all undervalued in my view, have strong share price momentum, and have potentially large markets to grow into. They may not grow by 10 times the investment over a decade, but they are likely to grow considerably nonetheless.
TechnologyOne Ltd (ASX: TNE) develops online enterprise resource planning (ERP) systems for managing companies with a lot of physical assets. The company was a pioneer in this space and predominantly services councils, utilities and universities.
The potential market for this company in Australia alone is quite large. Its customers and internet delivery model make it resistant to events like the coronavirus pandemic. Moreover, it is still a founder-led company, which I always prefer.
EML Payments Ltd (ASX: EML) has been cashflow positive for the past 4 years. In that time it has grown its free cashflow at a very healthy rate. The core market for EML is gift cards in supermarkets. This is a high margin area and is likely to pick up as pandemic restrictions ease. Its share price has grown 18% per year, on average.
If you are serious about creating wealth for life then, in my experience, part of your portfolio must be directed to early stage growth companies. These 2 ASX 200 shares are still in their growth phases. They have a very healthy level of cash flow growth, and have proven management teams in place.
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Daryl Mather has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends Jumbo Interactive Limited. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Emerchants Limited. The Motley Fool Australia owns shares of Altium. The Motley Fool Australia has recommended Emerchants Limited and Jumbo Interactive Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.