How to find a potential multibagger stock – explained

What is important is to follow the process of identifying good businesses and then look at both qualitative and quantitative data points.

Also another important thing that investors should keep in mind is that patience and conviction are the first building blocks multibagger stock be made. This process and time line can take anywhere between 2-3 years or sometimes less than a year to become a multibagger.

Also today an investor cannot make money from the past. One characteristic of a multibagger stock is that it should have immense growth potential in the future. The best way to understand future growth potential is to read a company’s vision and mission statement. You can find it in the company’s annual report.

If a company is very vocal about its vision and is able to explain the steps management is taking to achieve them, the company has great potential for future growth.

Smaller sized companies may also have the right characteristics of a multibagger stock, especially if it is a market leader in the business segment. Many companies which are small in size but have captured large market share in their niche have the potential to become multibaggers.

A company can grow in two ways. Organic growth and inorganic growth. Organic growth occurs when a company expands its business by investing capital and building assets.

When companies pursue inorganic growth, they start acquiring the assets of another company by acquiring or acquiring their business. Organic growth is a great way to expand and grow a business, but it takes time because companies have to build assets from scratch. On the other hand, inorganic growth, if done properly, is a much faster and better method for business expansion.

So what are the basics that one should check to start looking for multibagger stocks?

Is the company offering a unique product? Companies such as Coca-Cola have gained a sustainable competitive advantage by patenting the formula used to manufacture their beverages, providing a unique product that no other company can copy.

Does the company have a great brand or is it a monopoly? Brand means trust. When people trust a brand, they are willing to pay more for it. This allows the company to command high margins and consistent sales for an unlimited amount of time.

Company management is the heart of a business. The second most important feature of a multibagger stock is the honest management. An honest management clearly discusses its business goals and presents a blueprint for achieving it.

However, just talking about growth is not enough. An honest management should be able to demonstrate a plan or blueprint regarding its growth projections. A clear and time-bound targeted target should be placed before the investors.

To understand how ambitious the company’s management is, you need to look at its past performance as well. Analyze the past performance of the company, what goals and plans they had and how successfully they have achieved them. If the management has missed its past targets by a wide margin most of the time, it would be better to be cautious and tread carefully, history often repeats itself.

Also in most of the multibagger stocks it will be found that promoters will have high equity stake and very limited public shareholding. Companies that frequently dilute equity will not find support from the markets as this will reduce ROE and earnings growth.

Also multibagger stocks emanate from those companies which use their financial resources judiciously. Another proof of financially conservative management is that they generate lots of free cash flow (free cash flow = cash flow from operations – purchase of fixed assets). Free cash flow can be used to fund future expansion or to pay dividends to shareholders.

The first important factor among the quantitative characteristics of multibagger stocks is high earnings growth. To understand how fast a company is growing, it is important to evaluate its financial performance. While there are many ways to calculate earnings growth (such as the revenue growth model, profitability model, etc.), one of the most accurate measures is EPS (earnings per share) growth.

Multibagger stocks generally command higher profit margins. This is due to the fact that they have little or no competition or a strong brand presence which allows the companies to charge a premium on the products or services offered. Multibagger stocks tend to have higher returns than their peers. As a thumb rule, a potential multibagger stock should have a profit margin above 10%.

Debt can destroy the business of the company. While choosing multibagger stocks for investment, make sure that they do not have huge debt on their balance sheets. A debt free company is the best candidate for a multibagger stock.

Also the most important feature of a multibagger stock is that they generate high free cash flow. The reason why free cash flow is so important is because it is difficult to manipulate cash flow numbers, which gives investors a clear picture of a company’s true financial performance.

However, it is an important note to note when analyzing a company’s free cash flow. If a company has negative free cash flow, it does not necessarily mean that the financial condition of the company is deteriorating. When companies aggressively expand their businesses, they spend a lot of capital acquiring assets using their free cash flow. Since these assets are expected to generate more cash in the future, negative free cash flow is not bad if the company’s capital expenditures are increasing.

Hence this factor is also important when one looks ahead to multibagger stocks. And finally after these data points, it is important to find out what ROE and ROCE the company is generating – initially at least 15 to 18% is desirable and then can be further scaled up to 25 to 30% and above. may or may not. A high ROE tends to re-rate the stock for higher valuation multiples in future resulting in massive wealth creation thus making multibaggers.

Lastly, the most asked question is where to find such multibagger stocks? There are many free secondary resources such as annual reports, company presentations, quarterly conference call transcripts, quarterly results, but primary sources such as company talks, field visits to dealers, suppliers and customers give a better understanding of where to find future multibaggers, ultimately It is a process driven model which further helps us to find multibaggers.

,Avinash Gorakshkar is Head of Research at Profitmart Securities. The views expressed are solely personal and do not belong to Mint.