Over a long period of time, say 20 years or more, a couple of extra percent of growth can make a huge difference. To illustrate this point, let’s look at what would happen if I achieve an interest rate of 4% on £50,000. After 20 years, this would be worth just over £111,000. This assumes I add no more new money to the pot.
If I use the same numbers and change only my interest rate, to 7.5%, I end up with £223,000. That’s a massive £112,000 difference. This shows the power of compounding – growth that increases year-on-year.
It means small percentages over time can make a massive difference. And this is why I like the idea of investing at least some money in high-growth shares.
A growth share with more potential
Softcat is a reseller of technology, meaning it connects the big tech companies to users. This market is very lucrative with many big multinationals competing, but Marlow-based Softcat holds its own.
Its latest results showed pre-tax profits had grown 19% in the first half to £40.5m, while revenues had improved 21% to £524.1m. The CEO believes the company is still taking market share which bodes well for future profitability. He’s also said the trend for working from home, as a result of coronavirus, has benefitted the firm.
The group has an impressive track record of growing its customer base and improving profit per customer. These trends continued into the first-half results which saw the customer base grow by 4.2% and gross profit per customer increase by 12%.
A price-to-earnings growth ratio of between 1.1 and 1.2 indicates that the shares aren’t overly expensive. Softcat has significant potential to grow. Earnings per share, for example, have grown 20% year on year. At first glance, the shares may appear expensive, with a price-to-earnings ratio of a little over 30, but the company’s performance shows the growth shares have the potential to help investors increase their money.
A company hit harder by coronavirus
The short-term prospects for Auto Trader are less strong. Sales of cars have plummeted as a result of the coronavirus. Auto Trader has reacted to the environment by offering free advertising. This will help it keep market share by driving less well-financed competitors to the wall.
To strengthen its balance sheet it has also conducted a share placing equal to 5% of its share capital and put in place reductions to directors’ pay. Once the worst of the lockdown is over there’s little reason to think that Auto Trader can’t resume growing strongly, as it has in the past.
It also has a P/E of 1.2, which suggests the shares aren’t exactly undervalued but investors do get a quality company. It produces a lot of cash for investors, along with strong margins.
It’s a business that will survive the coronavirus and has brighter days ahead of it. I believe the shares should be a bit cheaper, but if they dip at all I’d invest in order to help fund an early retirement.
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Andy Ross owns no share mentioned. The Motley Fool UK has recommended Auto Trader and Softcat. 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.