1 overlooked ASX growth stock I'm chasing for multibagger potential

I believe this stock can create strong returns in the years ahead.

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The ASX growth stock Close The Loop Ltd (ASX: CLG) has excellent potential for returns, in my opinion. I've bought multiple parcels of shares for my portfolio, and I'm going to explain why I'm bullish about the business.

With the Close The Loop share price down significantly from its former heights – see below – I think it's a good time to invest.

The business collects and repurposes products through takeback programs and also provides sustainable packaging products. Its goal is for zero waste to go to landfills by recovering a wide range of electronic products, print consumables, cosmetics, plastics, paper, and cartons. It's also involved in reusing toner and post-consumer soft plastics for asphalt additives.

The ASX growth stock wants to be a global leader in the fast-growing 'circular economy', with an intention for global growth.

It currently operates in four places – Australia, the USA, Europe and South Africa. A large majority of its revenue comes from the US and Australia.

Growth of the circular economy

Close The Loop says the world has a circularity problem, with only a small percentage of consumer electronics being reused.

But, it has already reached a sizeable scale. It re-manufactures over 500,000 electronic consumables annually, as well as processing over 25 million print consumables each year. What can't be re-used is recycled.

The company notes that major original equipment manufacturers (OEMs), like HP, have ambitious ESG targets to increase circularity in the economy. Close The Loop suggests those OEMs need to partner with providers to achieve those goals.

HP is a partner of the ASX growth stock, with a three-year revenue-sharing contract. HP wants to reach 75% circularity for products and packaging by 2030 – it has reached 40% circularity by weight. HP also wants to use 30% postconsumer recycled content across HP's personal systems and print product portfolio by 2025 – in 2022 it achieved 15%.

HP is just one business, there's a lot of potential value for Close The Loop to provide and capture across the world.

Strong financial performance

The business is delivering good growth, helped by the acquisition of ISP Tek Services. In the FY24 first-half result, revenue increased 76% to $103.1 million, gross profit increased 94% to $37.3 million, underlying net profit before tax (NPBT) jumped 204% to $15.2 million and operating cash flow increased 105% to $12.3 million.

Close The Loop used a lot of the cash generated to improve its balance sheet – HY24 net debt (debt minus cash) decreased by $11.8 million, with a $4.2 million repayment of borrowings.

It's very pleasing to see the company's profit margins are rising at the various profit levels, as it means net profit can grow much quicker than revenue. And the revenue outlook is very positive, in my opinion.

Cheap valuation

The forecast on Commsec suggests the ASX growth stock could achieve 4.2 cents of earnings per share (EPS) in FY24, which would put the Close The Loop share price at 8x FY24's estimated earnings. EPS could rise by 38% over the next two years to 5.8 cents, which would mean it's trading at just 5.6x FY26's estimated earnings.

In my opinion, it would be very reasonable for this business to trade in 2026 at say 12x FY26's earnings, which would mean the Close The Loop share price could double in two years if that happened.

I expect the business to have a long growth runway, not just two years. I'm excited about what it can achieve over the rest of this decade.

Motley Fool contributor Tristan Harrison has positions in Close The Loop. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Close The Loop. The Motley Fool Australia has recommended Close The Loop. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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