The ASX share market can help us grow our wealth over the long-term. Some investments could generate strong returns if they are delivering earnings growth.
Investors usually value a business on how much profit it's making and how much profit it's expected to make in the long-term.
If I think about which ASX shares could deliver pleasing results over the next five years, I'd want to choose ones that could deliver strong compounding results. I think the two ideas below are very good contenders for achieving great returns.
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Guzman Y Gomez Ltd (ASX: GYG)
GYG is a Mexican food business with most of its operations in Australia, where it has a mixture of franchise and corporate stores. It also has a presence in Singapore, Japan and the US.
The company has an ambition to grow to 1,000 restaurants in Australia, which is approximately the same number as the number of McDonald's in Australia today. That would lead to a very pleasing scaling of the ASX share's operations if it reaches that goal. It's expecting to open 32 new locations in FY26 and add at least 40 locations annually in the medium-term. It currently has just over 210 locations in Australia.
GYG is aiming for its restaurants to deliver "compelling economics in time" with a target return on investment (ROI) of around 50% for corporate restaurants and around 30% for franchise restaurants (including royalties).
The ASX share is expected to see profit margins increase over time – it already has a track record of achieving this. The corporate restaurant margin has improved from 14.4% in FY23 and it's expected to rise to around 17.8% in FY25. Increasing sales at breakfast and after 9pm are particularly helpful for growing overall sales at a faster pace.
In the US, the business has board approval for 15 restaurants in total as it aims to build up its brand and increase sales to achieve restaurant margins similar to Australia.
I think this ASX share will be a much larger business in five years.
Global X S&P World EX Australia Garp ETF (ASX: GARP)
The idea of this fund is that it provides access to global companies which have strong earnings growth, solid financial strength and they're trading at reasonable valuations. This exchange-traded fund (ETF) follows a growth at a reasonable price (GARP) strategy.
When I think about which businesses are likely to perform the best for investors, it'd be the ones that are growing at a pleasing pace and not overly priced for that growth.
According to Global X, earnings have accounted for the majority of total shareholder return over the long-term – the company's earnings growth is the engine that drives long-term wealth creation. A GARP investing strategy has reportedly outperformed the broader global share market more than 90% of the time.
Of course, past performance is not a guarantee of future returns, but it's good to know the strategy has a track record.
There are a number of things the fund looks for, including sales and earnings growth, the price/earnings (P/E) ratio and quality (such as debt and the return on equity (ROE)).
The fund has a maximum allocation weight of 5% and a sector cap of 40% to ensure it's not too focused on one business or industry – it's rebalanced every six months.
It is invested in 250 quality companies from a range of sectors and countries, so it's pleasingly diversified, in my opinion. I'm calling it an ASX share because we can buy it on the ASX.
This is an ASX ETF I can see adding to my portfolio this year.
