ASX growth shares with strong earnings potential have the ability to deliver good shareholder returns.
I really like the look of the two stocks below because of their international expansion and ability to achieve operating leverage – that's where profit rises faster than revenue as margins increase.
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Collins Foods Ltd (ASX: CKF)
Collins Foods is a major franchisee of KFC outlets in Australia and Europe. It's also responsible for Taco Bells in Australia.
The company is steadily expanding its networks over time. In Australia, it had 275 restaurants as of the FY24 first-half result, and is on track to open up to 12 new restaurants in FY24. In Europe, it had 72 restaurants at the last count, with a further three new locations expected to open in the Netherlands in the second half of FY24.
Things are looking very positive in same-store sale (SSS) terms. In the first six weeks of the second half, KFC Australia's SSS growth was 2.9%. There was 8.1% growth in the Netherlands, 8.6% growth in Germany and 8.7% SSS growth at Taco Bell in Australia.
The FY24 first-half result saw revenue from continuing operations increase by 14.3% to $696.5 million and underlying net profit after tax (NPAT) growth of 28.7% to $31.2 million. Those numbers demonstrate solid operating leverage.
Profit growth looks very promising for the foreseeable future. The ASX growth share is predicted to see earnings per share (EPS) growth of 48.5% between FY24 and FY26. It's valued at just 13x FY26's estimated earnings. All in all, Collins Foods shares look cheap to me.
Close The Loop Ltd (ASX: CLG
This business aims to be a global leader in the 'circular economy', meaning it's involved in product recovery, recycling, and reuse. It promises that zero waste goes to landfills with the products it uses.
Close the Loop has many collection points in Australia, Europe, and North America. The company says it re-manufactures more than 500,000 consumer electronics — such as laptops, gaming devices, printers, and monitors — each year and processes more than 25 million print consumables per year. What can't be used is recycled.
It is working with some major clients, including HP, which wants to achieve 75% circularity for products and packaging by 2030.
The ASX growth share says the volume of consumer electronics and plastics is set to boom with regulatory and social pressure.
An increase in volume is resulting in operational efficiencies, according to Close The Loop, with the gross profit margin up from 33% to 36%. Its FY24 first-half result saw revenue rise by 76% to $103 million, while underlying net profit after tax (NPAT) jumped 164% to $13.25 million.
According to the estimate on Commsec, the Close The Loop share price is valued at 5x FY26's estimated earnings.
