Multibaggers are not easy to find the stock in the market. But as Dhoni says to follow the process the result is just the outcome. Same way if we follow the process of finding the stock and invest for long term returns then our future will cherish.
We have 12-point analysis for finding out whether the company is a multi-bagger or not. These 12 points include technical financial ratios and a fundamental understanding of the company’s management. This is the process we can follow for a better result but this doesn’t confirm you all the returns when the world is hit by COVID19 like a pandemic or World War III. Just kidding, let us check out the process to be followed
- Shareholding Pattern
When choosing the stock, check for companies with higher promoter (Owner) holding. Why? Because, if the promoter holds the majority of stock say above 60% of the shares then they have more interest in their business to grow which directly benefits them in a way of profit earnings. Also, aggressive decision making is possible and drives for better sustainable growth.
- PE Ratio
Price to earnings ratio is a value calculated as the current stock price divided by the earnings per share of the stock for that year. PE value in simple terms can be interpreted as the willingness of the investor to pay for a stock to earn ₹1 from it. The number helps us to determine whether the current price is overvalued or undervalued for the company based on comparison with the industry average value and other peer group companies. The PE value of the company can also be interpreted to determine the future expectation of the company by shareholders.
- Revenue & Profit – 5-Year Performance
The 5-year period analysis gives a clear picture of the consistency of the company’s performance in terms of generating revenue. Also, it depicts the management decision on increasing the profit over the years through organic (own growth) and inorganic (acquisition) methods. Both revenue and profit after tax (PAT) CAGR should be greater than 10%.
- Operating Margin (EBIT margin)
Operating Margin is the profit generated after sales of Rs.1. For instance, the operating margin of a Company A is 20% then the company generates an operating profit of ₹.20 from the sale of ₹1. That means operating margin is denoted in the percentage of profit generated from the sales before taxation and interest paid out on loans. This is used to understand the profit-generating ability of the company through the core operations. This can be compared to peers with a similar type of business models in the same industry. The higher the better but there’s no particular number because it varies from industry to industry.
- Debt to Equity (DE) Ratio
Company’s operation can be run by its owned money or lending money from banks or other options. DE ratio helps to find that how the company manages its operational cost and how much debt the company owns. When the DE ratio is higher than 2 then the company is definitely a riskier option for investors. Also, for future growth, it can always rely on leveraging this by slightly increasing its dependency on debt for any immediate requirements. To find out the good company is one which has less DE ratio i.e., almost zero which means it has more cash in its pocket to manage its operation and increase profit.
- Interest Coverage Ratio (ICR)
It denotes the company’s ability to manage its interest paid out on loans or any other debt interest. When the company has a low value of ICR that means the company is generating less operating profit to cover its interest. Always choose companies with ICR more than 3 or 4.
- ROE
Return on Equity (shareholder’s money) is an important parameter to access the company’s performance to generate returns for the investments done by all the shareholders. ROE should be between 15% to 25% based on the industry and in comparison to the peers.
- ROCE
Return on Capital Employed is the profit generated from the capital (in-hand money) invested. ROCE helps to access the company’s efficiency in creating additional income by using the available capital. The company with consistent ROCE or increasing ROCE over the years is considered to be better off than the company with higher ROCE one year and very low ROCE the next year.
- Dividend Payout or Dividend Yield
A dividend is the yearly profit sharing ability and mindset of the company’s management. When considering dividend yield for a good company is consistent payout over the years which gives a better return for the investors and also attracts more investors in the stock market in the future years.
- Bonus
A company that issue bonus shares in regular intervals gets you multi yield benefit. For instance consider Motherson Sumi Systems Ltd company which issued 1: 2 bonus shares once in 2 years from 2012. If you would have bought 100 shares in 2011 then the holding shares by 2012 would have been 300 shares after the bonus announcement, same way by 2014 – 900 shares, by 2016 – 2700 and by 2018 – 8100 and if they had issued same bonus this year then you would have been holding around 24,300 shares which itself got you multiple returns. The bonus issue is a reflection of the management that they want to reward loyal investors and have them with the company for the long term. So, try to check the bonus issuance of the company while picking the multi-bagger stock.
All these are parameters to check for picking the right stock for multifold returns over the long term period. But these are not only the parameters, apart from this one needs to follow the company’s leadership change, taxation changes in the industry to which the company belongs, etc. Always stock analysis comes with Terms & conditions.
Leave a Reply
You must be logged in to post a comment.