The ASX growth stock space is where I like to look for opportunities that could deliver strong capital returns.
Not only is capital growth great at increasing our wealth, but it also does so in a way where the tax burden is quite low. Capital growth is only taxed when the asset is sold, whereas dividend income and interest are taxed every year. Of course, there are plenty of businesses that are growing quickly and also pay a dividend.
I like businesses that are increasing their earnings rapidly because compounding is a very powerful financial tool that can allow companies to double in size. For example, if a business grows revenue by 20% per year, it will double in size in less than four years.
Having said all that, I think these ASX growth stocks below could have a very positive 2025.
TechnologyOne Ltd (ASX: TNE)
TechnologyOne is one of the most impressive software businesses on the ASX, in my view. It provides enterprise resource planning (ERP) for clients like local, state, and federal governments, as well as education (such as universities) and businesses. This is mission-critical for their software.
I have already missed out on some of the gains with TechnologyOne shares. In mid-October, I wrote how the ASX growth share was close to being my next investment. I didn't get around to investing, and it has risen 22% since then.
However, it's not too late for anyone, including me, to grab a piece of this exciting business.
The FY24 result – reported just over a month ago – included lots of positives. Total annual recurring revenue (ARR) grew 20%, with UK sales ARR jumping 70%. I think it's a great sign that growth in the UK is so strong because the UK provides the company with a large addressable market to target.
The company's long-term target of net revenue retention (NRR) of 115% is impressive. That means its existing client base generates 15% more revenue in the next year compared to the previous year, which is a strong organic growth rate. The ASX growth stock is achieving this by expanding its use of global software as a service (SaaS) ERP software to streamline its services.
TechnologyOne is also expecting profit growth. It achieved a profit before tax (PBT) margin of 29% in FY23, which rose to 30% in FY24. In the coming years, it aims for a PBT margin of at least 35%.
According to the broker UBS, the TechnologyOne share price is 35x FY29's estimated earnings. It's not cheap, but many of the ASX's best growth shares also trade on high earnings multiples.
VanEck MSCI International Small Companies Quality ETF (ASX: QSML)
I view smaller businesses as having more growth potential than larger ones, partly due to the fact they are still in the growth stage of their business life.
This ASX growth stock is an exchange-traded fund (ETF) focused on exciting businesses. Inside this portfolio are 150 of the world's highest-quality small companies. Small companies on the global stage are still relatively large – we're not talking microcaps.
The companies have achieved that status because they score well on three measurements: a high return on equity (ROE), earnings stability, and low financial leverage.
In the past five years, the index this fund tracks has returned an average of 15% per year. That compares to an average 13.4% return per year for the MSCI World ex-Australia, which is one measurement of the global share market.
With these businesses spread across different countries and sectors, I like the diversification on offer – this investment is not reliant on a few tech names to do well. In fact, only 8.6% of the fund is invested in IT businesses. Hence, I'm excited by how this fund could do in the long term.
