High-growth ASX shares can supercharge returns on your portfolio. Growth investors tend to focus on the future potential of a company and often prefer young companies in rapidly expanding industries. Many of these companies may not pay dividends as profits are reinvested into the business, however investors hope to achieve a return through capital gains.
Here we run through 2 metrics that can help you identify high-growth ASX shares.
EPS
EPS refers to a company's earnings per share. Earnings per share are calculated by dividing a company's profit by the number of ordinary shares it has on issue. The higher the EPS, the more profitable a company is. Growing EPS over time indicates that a company is improving its profitability and is a positive sign.
The earnings used in the EPS calculation can be misleading if distorted by once-off or unusual items. For example, the sale of a significant asset may inflate profits for a particular period, but is unlikely to have an ongoing impact. Likewise, the realisation of large impairments may negatively impact profits during a period without causing on ongoing decline in profitability. For this reason, analysts may choose to exclude these 'extraordinary items' from their measure of earnings when calculating EPS.
Early stage companies and startups may have low or no earnings per share, with investors banking that earnings will flow as the company matures. Later stage companies with an established market presence and revenue streams will generally have higher earnings per share. Growth shares will generally have growing EPS that may exceed the industry average.
ROE
ROE stands for return on equity. Return on equity is a way of measuring a company's profitability in relation to the money shareholders have invested. It is calculated by dividing a company's net income by shareholder equity. A high ROE indicates that the company is very efficient at generating returns using shareholder capital.
ROE can be used to compare a company to its competitors in the same industry or against the same company across different points in time. Doing so can give an indication of which companies in an industry are performing more efficiently, and of how the performance of a company changes over time. Growth shares should have a ROE that is improving over time and may exceed that of other companies in its industry.
Foolish takeaway
Used wisely, financial metrics can give useful insights into potential share market investments. These 2 metrics can indicate ASX shares with the potential for continued growth.
