I think that small cap ASX growth shares are some of the best ideas to buy for a portfolio.
It's much easier for a smaller business to double in size than it is for a larger business. Smaller businesses usually trade at a cheaper multiple than mid-caps because of less investor attention.
Here are three of my favourite ideas at the moment:
Bubs Australia Ltd (ASX: BUB)
Bubs is one of the promising small cap ASX growth shares in my opinion. It's a promising infant formula business with a specialty for goat milk products.
It actually sells a variety of different products including goat milk infant formula, baby food, organic grass-fed cow milk infant formula as well as other goat milk derived products.
I believe the company has lots of growth potential internationally. In the fourth quarter of FY20 it reported that China direct sales increased by 37% and other export sales increased by 71%. The company has plans to expand in several of Asia's largest countries, which could support a much bigger Bubs business.
Bubs also recently signed a deal with Beingmate that will see Bubs China label goat infant formula manufactured in China, made from Bubs Australian goat milk at one of Beingmate's registered facilities.
I think there is plenty of international revenue growth potential with profit margins likely to rise as infant formula (which is a higher margin product) becomes a larger part of the product mix.
The Bubs share price has fallen back to $0.93, which I think represents a great price to buy for the long-term.
Citadel Group Ltd (ASX: CGL)
Citadel is a small cap software ASX growth share. The original Citadel business offers important data management software for the defence, education and healthcare sectors. As you may be able to tell from its client base, it has fairly defensive earnings with the essential nature of its customers.
The company recently made an acquisition in the UK called Wellbeing. It's also a software business which is leading provider for healthcare providers in the UK. This business has higher recurring revenue and a higher earnings before interest, tax, depreciation and amortisation (EBITDA) margin than Citadel, so the acquisition will improve these two metrics for Citadel.
There are excellent cross-selling opportunities for Citadel over the medium-term and the international expansion opens up the possibility for Citadel to grow further internationally.
At the current Citadel share price it's trading at under 14x FY22's estimated earnings.
City Chic Collective Ltd (ASX: CCX)
City Chic is one of the best Australian retail businesses in my opinion. The small cap ASX growth share sells plus-size clothes, footwear and accessories in Australia and New Zealand with its stores and website.
It also sells a large and growing amount of product in the northern hemisphere with websites and through retail partnerships.
In FY20, the company managed to achieve 31% sales growth with unaudited underlying earnings before interest, tax, depreciation and amortisation (EBITDA) of $26.5 million despite all of the COVID-19 impacts and disruptions.
I like the current City Chic strategy of buying distressed US competitors and turning them into online-only offerings. It lessens competition and grows the business. An online-only offering comes with lower operating costs.
At the current City Chic share price it's trading at around 22x FY22's estimated earnings.
Foolish takeaway
I think each of these small cap ASX growth shares have very promising futures. At the current prices it's hard to pick a winner because they all have promising growth potential.
Bubs has the product range to become a much larger business, it just needs to win market share. Citadel has inherent advantages as a software business, but it will need to win new contracts. I'm not sure how big City Chic can become, but the recent acquisitions can help if they're integrated into the company effectively.
