3 reasons why Xero (ASX:XRO) is such a high-quality ASX share

There are a number of great reasons why Xero Limited (ASX:XRO) is such a high-quality ASX share to look at for investors right now.

| More on:
woman touching digital screen stating fintech

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

There are a number of reasons why Xero is such a high-quality ASX share worthy of being in most portfolios.

The cloud accounting software business started off in New Zealand but has now expanded significantly to become a global business.

The Xero share price has gone up by 74% over the last year. There are a few reasons why it could just keep climbing:

High margins

Xero has one of the highest gross profit margins on the ASX.

In the FY21 half-year result it reported that the gross profit margin increased from 85.2% to 85.7%. That shows how profitable it is for Xero to add new subscribers.

The power of software is that it can be replicated for clients at very little cost.

Almost all of the new revenue falls to the next profit line.

Xero invests a lot of money into growing the business, but COVID-19 saw the company remain disciplined with spending money. It showed how profitable it could become in the future. Whilst operating revenue grew by 21%, earnings before interest, tax, depreciation and amortisation (EBITDA) went up 86% to $120.8 million.

Long-term growth focused

Xero has been focused on growth for over a decade. It's trying to invest as much as it can into initiatives that make sense to improve its offering for subscribers and growing market share.

This results in a lower EBITDA and net profit margin than it is capable of, but it grows the value of Xero for shareholders faster (in a more tax efficient way).

Indeed, Xero says:

Xero is a long-term orientated business with ambitions for high-growth. We continue to operate with disciplined cost management and targeted allocation of capital. This allows us to remain agile so we can continue to innovate, invest in new products and customer growth, and respond to opportunities and changes in our operating environment.

Xero has been making bolt-on acquisitions to fast-track an improved product. Tickstar and Planday are two of the latest examples.

Xero is a global leader

Xero is arguably the best cloud accounting company in the world.

It has created numerous time-saving and useful tools, including workflows that can be automated.

The cost of a Xero subscription to subscribers is relatively low, making it very attractive value for business owners and accountants who appreciate how quickly the software does what they want it to. Time is money, after all.

Xero reported in the FY21 half-year result that its total subscriber numbers increased by 19% to 2.45 million in the FY21 half-year result. That included 1 million subscribers in Australia (up 21%), 638,000 in the UK (up 19%), 414,000 in New Zealand (up 13%) and 251,000 in North America (up 17%). The other segment that Xero reports is 'rest of the world' which had 136,000 subscribers – an increase of 37%. The rest of the world includes dozens of countries, but notable locations include South Africa and Singapore.

It's already one of the largest tech shares on the ASX, it could become one of the biggest overall companies in the years to come. 

Should you invest $1,000 in Commonwealth Bank Of Australia right now?

Before you buy Commonwealth Bank Of Australia shares, consider this:

Motley Fool investing expert Scott Phillips just revealed what he believes are the 5 best stocks for investors to buy right now... and Commonwealth Bank Of Australia wasn't one of them.

The online investing service he’s run for over a decade, Motley Fool Share Advisor, has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

And right now, Scott thinks there are 5 stocks that may be better buys...

See The 5 Stocks *Returns as of 30 April 2025

Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Xero. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on Growth Shares

Two people having a meeting using a laptop and tablet to discuss Seven West Media's balance sheet
Growth Shares

3 excellent ASX shares to buy for your SMSF

Analysts think these shares could be top picks for SMSF investors. Let's find out why.

Read more »

A woman presenting company news to investors looks back at the camera and smiles.
Growth Shares

2 ASX growth shares to supercharge your portfolio

Analysts think these shares could be in the buy zone for growth investors right now.

Read more »

A group of people gathered around a laptop computer with various expressions of interest, concern and surprise on their faces. All are wearing glasses.
Growth Shares

Turn $300 into significant wealth: 3 explosive ASX opportunities for Aussie investors

Analysts think these shares could be great picks for growth focused investors.

Read more »

A man looking at his laptop and thinking.
Growth Shares

What I'd buy with $2,000 on the ASX right now

Here are three options for investors to look at this month.

Read more »

Silhouette of CEO standing in conference room looking out at cityscape.
Growth Shares

3 founder-led ASX 200 shares with serious long-term upside

Let's see what makes these shares top picks according to analysts.

Read more »

Man holding out Australian dollar notes, symbolising dividends.
Growth Shares

Where to invest $5,000 in ASX 200 shares in May

Analysts think that these shares could be top picks for Aussie investors next month.

Read more »

Two happy excited friends in euphoria mood after winning in a bet with a smartphone in hand.
Growth Shares

3 fantastic ASX growth shares to buy with $2,000 in May

Analysts think these shares would be top picks for growth investors right now.

Read more »

A man points at a paper as he holds an alarm clock.
Growth Shares

3 ASX 200 stocks to buy and hold forever without thinking twice

Here's why these shares could be great buy and hold options for investors.

Read more »