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Can you retire on this small-cap that’s returned 62% pa since 2013?

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Investing in small-caps can be a risky business, but occasionally one company will emerge that makes up for all the extra time you’ve spent researching opportunities. 

I believe Swallowfield (LSE: SWL) is one such business. With a market value of only £65m at the time of writing, the company is a tiddler. But it’s growing rapidly, and if growth continues at the rate it has done for the past three years, the firm will soon find itself in the mid-cap index. 

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Indeed, over the past three years, Swallowfield has gone from strength to strength. For the fiscal year ending 30 June 2014, the company reported a pre-tax profit of only £140,000 and earnings per share of 3.9p. However, by 30 June 2016 earnings per share had jumped 350% to 17.7p. 

If City forecasts are to be believed the company has not finished growing yet. Analysts have pencilled-in earnings per share growth of 17% for this fiscal year and the same for the year ending 30 June 2018 taking EPS to 24.3p for growth of 530% in five years. 

Can the growth continue? 

The question is, how much longer can Swallowfield’s rise continue? Well, since 2014 management has been on a mission to strengthen the group and turn it into a market leader in the development, formulation, and supply of personal care and beauty products. There have been several parts to this strategy including 1) innovation, 2) product focus, 3) growth of own-brand sales and, 4) cost base optimisation. 

On all of these strategic targets, the group seems to be firing on all cylinders. During the first half of fiscal 2017, the company launched 35 new products. Meanwhile, original Swallowfield-owned brands showed combined revenue growth of 50% (from a relatively small base). To complement growth during 2016, Swallowfield acquired Brand Architekts, the owners of a portfolio of mid-premium beauty, body and haircare brands such as The Real Shaving Co and Dirty Works. 

To help drive down costs management has merged marketing agencies and invested in automation to increase production efficiency as well as lowering costs. Additionally, the company is growing its overseas presence, and international sales now account for 23% of total group sales. During the first half new distribution agreements were signed in Austria, the Netherlands, and Chile.

Growth worth paying a premium for?

It looks as if Swallowfield is making all the right moves to ensure that it can continue to grow in the years ahead and I’m optimistic about the company’s outlook. The one problem is that shares in the firm currently look relatively expensive, considering that they have risen in value by nearly 150% over the past 12 months. At the time of writing, the shares trade at a forward P/E of 16.8, a valuation that does not leave much room for manoeuvre if growth begins to splutter. 

That being said, for the past three years the company has traded at an average P/E of 17.4, and including dividends, over this period the shares have produced an annualised return of 62%. So overall, if it’s a high-growth small-cap you’re looking for, Swallowfield could be the company for you.

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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