The Art of Identifying Multibagger Stocks.

4 min read
The Art of Identifying Multibagger Stocks.

A Multi-Bagger stock is an equity stock which gives a return of more than 100% and whenever you think of finding out the future Multibagger stocks then think about these 11 Golden Aspects, as it covers everything.

  1. Compounded sales growth should be at least 10%.
    It talks about whether the company has the ability to sustain in this competitive market or not.
  2. Gross Profit Margin should be Better and Consistent as compared to the Industry Average.
    GPM comes when you deduct direct cost i.e.COGS (Cost of Good Sold) from the Revenue of the company. This show how effectively the company is managing the costing of raw materials. For example, Jet Airways had to close the operations because its COGS (Along with SG&A) was higher than the Revenue.
  3. Net Profit Margin should be Better and Consistent as compared to the Industry Average.
    Of course, we must be concerned about the bottom line of the company. How profitable the company is, as compared to its peers.
    Note: ‘Other income’ in the P/L statement must play a minor role.
  4. Debt level should be as low as possible.
    No doubt, in any case, Debt/Equity should be less than .5
    Companies with higher debt levels face a cash crunch as they have payback interest cos, back to the lender from their revenue (even if it declines). Cash flow from operating activities should always be consistent.
  5. Sufficient Free Cashflow: Free cash flow is the remaining cash when the company spends capex from their cash flow. Free cash flow or free cash flow to the firm is a way of looking at a business’s cash flow to see what is available for distribution among all the securities holders of a corporate entity. It can be used for debt payment, growth etc.
  6. Coverage Ratio: Interest coverage ratio plays a very important determining the actual financial health of the company. Interest Coverage Ratio: EBIT/ Interest cost. So, it compares the earnings to the interest payment of the debt. As far as the company has sufficient cash to repay the debt, there is no reason to worry. It should always be as high as possible.
  7. Current Ratio: Working capital determines the difference between the Current Asset and Current Liability. The current ratio is the ratio of Current Asset and Current Liability. It should be in the range of 1.5 to 5 (Not even more than that).
  8. ROE, ROCE and ROA: These three ratios brothers explain much more than what you can expect.
    ROE: NI/ Shareholders Equity
    ROCE: EBIT / Capital Employed
    ROA: NI/ Total Assets.
    For any stock, There three must be higher and consistent.
  9. The pledged percentage must be 0.00 %.
    Good companies like Jain Irrigation, Sterlite Tech isn’t growing and the stocks fall even after steller profits and Revenues, Because of high Pledged %.
  10. Promoter holding: Higher the promoter holdings, Higher of the confidence of management on the company, Better growth and earnings can be expected. More than 50% is preferable.
  11. Margins: More than Profit and Revenues, one must concentrate on Margins. Suppose we have two companies with the same Net Profit figures 10 Cr. Then how would you identify the better performer?
    By Margins. You can use Net profit Margin (NI/Revenues) or EBITDA Margin ( EBITDA/Revenues) or EBIT Margin (EBIT/Revenues) or Gross Profit Margins (Gross Profit / Revenues).
  12. Scope: The Industry which you have chosen should have potential cope in the future.

If you concentrate here, we have actually covered everything.
Debt, Reserves, Working Capital, Margins, Scope, Shareholding, Pledged Percentage, PP&E, Cashflow, Revenues and Profits.

Let’s take one example.

DCM Shriram Ltd has delivered 100% in last 1 year.

# Let’s see if it was meeting our criteria.

  1. Compounded sales growth should be at least 10%.
  2. Gross Profit Margin should be Better and Consistent as compared to the Industry Average.


3. Net Profit Margin should be Better and Consistent as compared to the Industry Average.

4. ROE, ROCE and ROA:

5. Margins:


6. The pledged percentage is 0.00 %. ( As of June 2019)

7. Coverage Ratio: 10.92

8. Current Ratio:

9. Sufficient Free Cashflow:

  • Free cash flow last year: 447.66 Cr.
  • Free cash flow 3years: 530.46 Cr.
  • Free cash flow 5years: 1,561 Cr.

9. Debt to equity: 0.42

10. Promoter holding.

12. Industry Scope:

The Indian cement industry is dominated by a few companies. The top 20 cement companies account for almost 70% of the total cement production of the country. A total of 210 large cement plants account for a cumulative installed capacity of over 410 million tonnes, with 350 small plants accounting for the rest. Of these 210 large cement plants, 77 are located in the states of Andhra Pradesh, Rajasthan, and Tamil Nadu.

That’s how we can analyse a stock and find a Potential Future Multibagger.

You need to have the expertise in Fundamental Analysis of the company in order to find out actual financial health.

Hope it was helpful.

Akshay Seth | Linkedin

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