The Xero Limited (ASX: XRO) share price is the best performer in the ASX 200, it’s going nuts.
Founded in New Zealand in 2006, Xero has become the dominating player in the business and accounting software market in Australia, New Zealand and the UK. Employing more than 2,300 people, Xero helps more than 1.8 million subscribers manage their accounting and tax obligations.
Why The Xero Share Price is Going Bananas
The Xero share price is currently up around 10.5%, reaching an all time high in the process.
Xero released its annual result to shareholders this morning and there were a number of great pieces of news in it.
Positive Free Cash Flow
For the first time Xero reported that it had generated positive free cash flow. In FY18 its free cash flow was minus NZ$28.5 million, but in FY19 its free cash flow was NZ$6.45 million.
Achieving this is an important step for any tech company that’s trying to expand across the world.
Second Half Profit
Not only did Xero improve its net loss after tax (NLAT) excluding impairments by 63% to NZ$8.5 million, but the accounting business said it achieved a positive net profit after tax (NPAT) of NZ$1.4 million in the second half of the annual result.
Xero said it had UK net subscriber growth of 151,000 during FY19, with 108,000 of those net subscribers added in the second half of FY19.
This growth translated to 50% revenue growth in NZ dollar terms, or 45% in constant currency terms
Increased Profit Margin
One of my favoured metrics to identify quality individual businesses is that the profit margins keep growing as it keeps growing bigger.
The Xero gross profit margin improved by 2.1 percentage points to 83.6%.
Xero recognised a NZ$16.3 million impairment due to the decision to discontinue its US payroll product and move to services provided by Gusto – a US cloud-based payroll provider.
Overall, Xero said it’s going to keep re-investing most of its cash generated to keep growth going. , But the company did say that free cash flow in FY20 is likely to be a similar proportion of total operating revenue.
Xero’s future certainly looks ‘beautiful’, but the current share price reflects that beauty.
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Disclaimer: Any information contained in this article is limited to general financial/investment advice only. The information has not taken into account your specific needs, goals or objectives, so please consider consulting a licenced and trusted adviser before acting on the information. Please read The Rask Group’s Financial Services Guide (FSG) for more information. This article is authorised by Owen Raszkiewicz of The Rask Group, which is a corporate authorised representative No. 1264179 of Strawman Pty Ltd (ACN: 610 908 211) (AFSL: 501 223).
At the time of publishing, Jaz does not have a financial interest in any of the companies mentioned.