There’s a variety of ways that you can value a share. One of the most common is to consider its current price in relation to its near-term earnings potential. This can be calculated by looking at its price-to-earnings (P/E) ratio or its price-to-earnings growth (or PEG) reading. They are handy ways to try to find value but it’s not a foolproof way to help you get rich and retire early.
Indeed, some shares are cheap for good cause. BT, for example, trades on a forward P/E ratio of below 10 times because of its battered balance sheet and the colossal threat of rising competition at its consumer division.
Ultra-cyclical share OneSavings Bank also trades under this rock-bottom level because of the threat of a prolonged UK economic downturn. And the possibility of sinking demand for big-ticket items leaves Dixons Carphone trading on a multiple under the bargain benchmark of 10 times, too. An elevated level of risk is often the price investors have to pay for a low multiple. And this can come at a high price for investors and destroy their attempts to get rich.
Moving on up
It can pay to forget about low valuations and to pay extra for shares of supreme quality. In the long run, the cream tends to rise to the top – the impact of an elevated near-term P/E ratio is ironed out. Don’t let a high premium deter you from taking the plunge. Many shares are highly rated by the market for a good reason.
Take Games Workshop Group (LSE: GAW) as an example. The business – which produces and sells miniature war games for fantasy lovers – was one of the stars of the second quarter. Its share price rocketed 85% over the period despite its high P/E ratio. These more recent gains leave it trading on a high forward earnings multiple of around 45 times. Still, I’d happily buy it for my own ISA as it has all the tools to help you get rich and retire early.
Get rich with Games Workshop
Economic downturns can devastate profits for many retailers. But it’s not a problem that Games Workshop is likely to suffer from following the coronavirus crisis. Sellers of essential goods like supermarkets are widely considered ‘recession proof’ but they are not alone. Niche products retailers like this FTSE 250 share can also thrive in good times and bad.
Games Workshop’s trading update of mid June underlined this point perfectly. It said that its sales performance since re-opening its stores following the Covid-19 breakout “has been better than expected” and raises hopes that trading will remain robust despite the upcoming global downturn.
Games Workshop has a number of strings to its bow. It has a so-called ‘economic moat’ against its competitors insomuch that its fantasy products have been the gold standard for decades and subsequently command a very loyal following. The business is bringing its products to a steadily-growing worldwide audience and now sells into around 70 countries. And it is taking steps like launching a Warhammer online store in China to ride the e-commerce boom, too. If you’re looking for hot growth shares to help you get rich and retire early you need to give Games Workshop serious attention.
Royston Wild has no position in any of the 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.