The Motley Fool

3 small caps I’d buy to compound my wealth

Compounding is a wonderful wealth builder. Even small positions in wonderful companies can become meaningful wealth builders when those companies earn high rates of return and are given a long period of time.

Here are three small cap companies with high rates of return on equity, low levels of debt, alongside room for exponential growth over many years.

IDP Education Ltd (ASX: IEL)

IDP Education provides placement services for international students into educational institutions in Australia, the UK, America, Canada, and New Zealand. Some of the other services that it provides include student counselling, application processing, and English language testing.

IDP Education has achieved a fantastic return on shareholders’ equity of 48% in 2017, with similarly high returns forecast for the next few years. The company’s market capitalisation has been rapidly growing, and currently sits at around $1.89 billion. However, the market cap will be much larger if it continues to compound at 45%, which it could well do on the back of the strong education sector in Australia.

Integrated Research Limited (ASX: IRI)

Integrated Research is a global provider of proactive experience management solutions for critical IT infrastructure, payments and communications ecosystems. Its unified communications segment provides solutions to maximise online user experience, for example by providing call quality troubleshooting and proactive alerting.

Its call centre segment provides solutions to optimise customer call centre experiences. Its payments segments keeps customers up-to-date with payment technologies and enables transition to the latest technologies. Lastly, its infrastructure segment provides infrastructure and IT service management.

The growth in online retailing has been fast, but online retailers will need to maintain a focus on delivering a high quality customer experience. This is where Integrated Research can really benefit on the back of a growing market. Its current market capitalisation is around $667 million, and it achieved a return on equity of 38% last financial year.

Codan Limited (ASX: CDA)

Codan is engaged in the development of electronic solutions for government, non-government, and consumer markets. Its businesses include radio communications, metal detection, mining automation, and defence electronics.

Codan has a market cap of around $438 million, placing it firmly in the small cap space. Its diverse businesses each target reasonably large markets, and these give Codan room to grow in multiple areas. In the 2017 financial year, the company achieved a return on equity of 27%. If it continues to compound shareholders’ equity at 27% the company would be a great addition to any portfolio. However, analysts have forecast a small reduction in return on equity to around 20% for the next 3 years.

Foolish takeaway

Idp Education, Integrated Research and Codan are three small cap businesses with lots of room for growth that could compound returns at high rates. I’d buy these three businesses to hold them for many years, and let management do the work to compound my wealth.

OUR #1 dividend pick to grow your wealth over the new financial year is revealed for FREE here!

Financial year 2018 is here and The Motley Fool’s dividend detective Andrew Page has revealed his must buy dividend share to grow your wealth in 2018.

You might not know this market leader's name, but it's rapidly expanding into a highly profitable niche market here in Australia. Even better, the shares boast a strong, fully franked dividend that should balloon in the years to come. In other words, we're looking at the holy grail of incredible long-term growth potential AND income you can watch accruing in your account in real time!

Simply click here to grab your FREE copy of this up-to-the-minute research report on our #1 dividend share recommendation now.

Motley Fool contributor Stewart Vella has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Integrated Research Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

FREE REPORT: Five Cheap and Good Stocks to Buy now…

Our Motley Fool experts have FREE report, detailing 5 dirt cheap shares that you can buy today.

One stock is an Australian internet darling with a rock solid reputation and an exciting new business line that promises years (or even decades) of growth… while trading at an ultra-low price…

Another is a diversified conglomerate trading near a 52-week low all while offering a 2.7% fully franked yield…

Plus 3 more cheap bets that could position you to profit over the next 12 months!

See for yourself now. Simply click the link below to scoop up your FREE copy and discover all 5 shares. But you will want to hurry – this free report is available for a brief time only.