ASX growth shares can deliver the most growth over the long term thanks to the power of compounding. If I were investing $500 today, I'd want to choose stocks that can grow earnings significantly but aren't priced exorbitantly.
There are plenty of great businesses on the ASX, such as WiseTech Global Ltd (ASX: WTC), Pro Medicus Ltd (ASX: PME) and REA Group Limited (ASX: REA). However, these stocks certainly come with hefty price/earnings (P/E) ratio price tags.
There are a few different factors I'd want to identify with a compelling ASX growth share.
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ASX growth share characteristics I look for
One of the first things I'm looking for is that the business has a solid core offering that seems relatively insulated from technological change and competition – some industries are changing (and being challenged) very quickly.
Next, ideally, I want to see that the ASX growth share has in-built operating leverage, meaning as the business becomes bigger, profit margins grow enabling net profit after tax (NPAT) to rise faster than revenue. Why is that important? Profit is usually what investors use to value a business, and profit pays for dividends. Accelerating profit should mean good shareholder returns over time.
Global growth is a key factor that I like to look for. Australia is a great country, but the relatively small population means the growth ceiling can be reached fairly quickly. Tapping into the North American, Europe or Asia markets can be very lucrative for an ASX company.
Finally, I'd want to invest in a business that is reasonably priced, thinking about the potential profit it may generate in the next two to three years.
Where I'd invest $500 right now
I'll talk about my latest ASX growth share investment, seeing as I made it just a few days ago.
Collins Foods Ltd (ASX: CKF) operates KFC outlets in Australia, the Netherlands and Germany. It's also responsible for Taco Bells in Australia. I think KFC has a strong brand, and I can't see food as we know it being replaced any time soon.
It's displaying excellent operating leverage at the moment. In the FY24 first-half result, Collins Foods reported revenue rose 14.3%, underlying earnings before interest, tax, depreciation and amortisation (EBITDA) increased 16.7% and underlying net profit went up 28.7%. That's exactly the sort of profit margin improvement I like to see.
There is plenty of room for Collins Foods to grow its KFC and Taco Bell networks in Australia, and the potential growth in Germany and the Netherlands is very compelling to me. It opened four new KFC locations in Australia in HY24 and eight in the Netherlands.
According to the estimates on Commsec, Collins Foods shares are valued at 18x FY24's estimated earnings. It is then projected to grow earnings per share (EPS) by 44% to 74.8 cents, which puts it at just 13x FY26's estimated earnings.
Collins Foods isn't the only S&P/ASX 200 Index (ASX: XJO) share that I've invested in recently. I've also written about Corporate Travel Management Ltd (ASX: CTD) here and Johns Lyng Group Ltd (ASX: JLG) here as other ideas.
