The fastest growing company is growing its annual recurring revenues (ARR) at 190% year on year, and the second fastest at 133%.
ARR = Annual Recurring Revenue
ARR Multiple = Market Capitalisation divided by ARR
YoY ARR Growth = Year on year ARR growth as a % (difference between ARR today and the same time 12 months ago)
G-A EV/ARR Ratio = Growth-adjusted enterprise value to ARR ratio (ARR Multiple rate divided by YoY ARR growth)
What are the growth rates of some of the best and fastest growing ASX SaaS companies?
Pointerra is the fastest growing ASX SaaS company, followed by K2fly [please note that not all ARR figures are as at 30 September 2020 due to inconsistencies in reporting among companies (e.g. some companies ARR figures are 31 March 2020 or 30 June 2020)].
|Company Name||Ticker||Market Capitalisation||Current ARR||YoY ARR Growth||G-A EV/ARR Ratio|
|PayGroup (March FY)||PYG||$42,983,000||$17,800,000||112%||2%|
|Dubber Corp Ltd||DUB||$376,270,129||$18,100,000||81%||26%|
|RPMGlobal Holdings Ltd||RUL||$260,801,796||$13,500,000||69%||28%|
|Bigtincan Holdings Ltd||BTH||$469,494,263||$32,400,000||38%||38%|
|Schrole Group Ltd||SCL||$11,601,005||$4,650,000||29%||9%|
|Readytech Holdings Ltd||RDY||$174,477,057||$16,800,000||17%||62%|
Ideally you want to look for companies in the right hand side of the graph below, and then preferably in the bottom right hand corner.
What is growth-adjusted enterprise value to ARR multiple and why is it important?
The G-A EV/ARR Ratio normalises growth. It asks the question – for each percentage of ARR growth, how much am I paying?
You want to find the fastest growing SaaS companies with the lowest G-A EV/ARR Ratio because you are paying the least amount possible for each percentage of ARR growth relative to other companies.
Similar to the ARR Multiple vs. YoY ARR Growth bubble graph above, you want to find companies in the right hand bottom corner of the this graph (you are paying the least for growth – meaning they are relatively cheap for how fast they are growing).
How does the G-A EV/ARR Ratio work?
This is not a new concept, but is one that is rarely applied in the SaaS space.
For example, a Private Equity (PE) firm that pays a 4x multiple on revenue for a company that is growing 20%, they are buying in at a 0.2 growth-adjusted EV/Revenue ratio. This was spelt out in Dave Kellog’s blog post “Are we due for a SaaScre?“
So let’s use the ratio that PE firms use (0.2 or 20%) as a benchmark and compare a few companies from the graph above.
How we apply this normalisation method to SaaS companies can be seen by comparing the following 3 companies:
Formula = EV/ARR Multiple divided by (YoY ARR Growth*100)
Pointerra: 50 / (190% *100) = 0.26 (or 26%)
K2fly: 15 / (133% *100) = 0.11 (or 11%)
Openlearning: 44 / (59% *100) = 0.75 (or 75%)
In summary, if we use the 20% benchmark that PE firms and compare it to Pointerra’s 26%, then it is fairly priced given how fast it is growing (especially when you compare it to Openlearning where investors are paying almost 3x more for each % of grow in ARR, which means its extremely expensive). Then, if we look at K2fly at 11%, it seems to be a bargain (half the ratio that PE firms pay, 20% for slow growing traditional companies) as you are paying very little for each percentage % growth in ARR.