These promising small-caps could help you retire early

Buying these two companies seems to be a logical move based on their risk/reward ratios.

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Planning for retirement is never an easy task. It’s difficult to obtain the right balance between risk and reward, while also seeking to diversify. Given that share prices have generally risen in recent months, finding stocks with a sufficiently wide margin of safety may now also make retirement planning even more difficult. However, here are two shares which could help you to achieve an improved retirement from a financial perspective.

Results announcement

Reporting on Monday was building services company Bilby (LSE: BILB). The company announced full-year results which showed that it has made progress when compared to the prior year. As part of its growth strategy, the company acquired DCB for a maximum consideration of £4m, as well as Spokemead for a maximum consideration of £8.7m. They have enabled the company to expand its range of services, which may help it to broaden its customer base and geographical reach.

Furthermore, the company achieved significant contract momentum in the second half of the year. This should help to underpin additional growth in future years, while investment in operational systems and efficiencies during 2017 enabled it to increase its cash reserves to £1.9m by the end of the year. This should provide additional capital which could be used for more growth over the medium term.

In terms of its growth potential, Bilby seems to have a bright future. It is expected to report a rise in its bottom line of 10% in the current year. This puts it on a price-to-earnings growth (PEG) ratio of 0.9, which indicates that its share price could see a recovery following a 45% fall in the last year. Certainly, it is a smaller company which, by its very nature may be high risk. However, the returns on offer may also be impressive.

Low valuation

Also offering strong earnings growth potential is strategic planning and management services provider Impellam (LSE: IPEL). It is forecast to increase its bottom line by 8% in the current year, followed by further growth of 10% next year. Despite this above-average growth rate, the company trades on a discount valuation. For example, it has a price-to-earnings (P/E) ratio of just 7.7, which suggests its share price could rise significantly even after gaining 127% in the last five years.

As well as high growth potential, Impellam also has a relatively sound income outlook. It currently yields 2.8% from a dividend which is covered around 4.5 times by profit. This indicates that it could increase shareholder payouts at a much faster pace than profit growth, while maintaining high investment in the business for long-term growth. With inflation moving higher, this could prove to be a fillip for the company’s investors. As such, buying the stock now for the long run could be a shrewd move owing to its potent mix of income, value and growth appeal.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Peter Stephens 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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