I believe that ASX share that are rapidly growing should be contenders to go on a watchlist.
Compounding growth can be a very strong force. It can also be heavily underestimated over longer periods of time.
Not every business that is growing quickly is worth owning, but I think it is worthwhile keeping an eye on these two ASX shares:
Xero Limited (ASX: XRO)
Xero is one of the biggest accounting software companies in the world. It is turning itself into a small and medium business technology platform. It offers a growing number of the things a small business may need.
There are many attractive things about Xero.
For me, one of the main ones is its gross profit margin – it’s very high. In the recent HY22 result it revealed that the margin increased by another 1.4 percentage points to 87.1%. The higher this number goes, the more that Xero’s revenue turns straight into usable profit to spend on growth, or it can add to the bottom line profit.
Xero is indeed putting a lot of financial fire-power into growing at the moment. There is a huge global opportunity for the ASX share. Total operating expenses as a percentage of operating revenue increased to 83.4%, showing how much the business is investing to achieve long-term growth.
This expansion is coming through in the growth of revenue, subscribers and the length of time that subscribers are staying with Xero.
Operating revenue increased 23% to NZ$505.7 million, annualised monthly recurring revenue grew 29% to NZ$1.13 billion and the total lifetime value of subscribers rose 61% to NZ$9.94 billion. Average revenue per user (ARPU) increased from NZ$29.3 to NZ$31.22, whilst all markets recorded lower churn. Year on year, subscriber churn fell from 1.11% to 0.88%.
L1 Long Short Fund Ltd (ASX: LSF)
This is a listed investment company (LIC) which invests in both ASX shares and international shares. L1 can also short shares. It has a remarkably strong but consistent performance since the L1 strategy started several years ago. It has achieved a net return of more than 25% in six of the last seven years.
Past performance is no guarantee of future performance of course, and this ASX share LIC does charge higher fees than most.
The LIC is seeking to pay a growing dividend to shareholders. The L1 Long Short Fund share price is currently at a 8% discount to the underlying net assets before tax.
I think it could be a good diversification idea, as well as a potentially good performer over time.
