How to identify multibagger stocks?

The stock market can never assure returns while we invest in a stock, but certain signs can help an investor identify multibagger stocks. 

• • Look at the P/E ratio and EPS (earnings per share) 

The rule is simple, an investor can milk profits only if the company makes profits. We should look at the earnings of a company to find an upward trajectory. Typically, the company of a multibagger stock will have a high revenue growth model, profitability model, and capital allocation model.

Investors can calculate EPS (earnings per share) of trailing 12 months to check against each share how much a company has earned. In the case of a multibagger stock, the EPS should be on a climbing mode. Another metric to find if the company is making profits is through the P/E ratio. The probability of a stock becoming multibagger is high if its P/E ratio is high as compared to its stock price.

 Apart from these two metrics, one should also look at the debt to ensure that it is not more than the EPS value. 

• • Check EBITDA and revenue

To determine multibagger stocks, investors must look into the quarterly performance of the company’s revenue, EBITDA, and net profit. Parameters – revenue and EBITDA – reflect the company’s operating profitability and cash flow. If the EBITDA numbers are high, it reflects the company’s operating expenses to be low against the profits earned eventually meaning the cash flow to be high. Such signs make the stocks multibagger.

Moreover, the stocks of the companies should be able to produce sustained margin over time that does not vary with every quarter or year. 

• • Strong management 

A strong management team is key to a business’s growth. Aspects like governance practices, board independence, diversion of funds to other businesses or for personal interest, pledging of shares, discipline with obligations, capital expenditure and financial matters, etc. should be researched by the investor. Good management practices have an impact on a company’s operations eventually driving its profits.

• • Source of earnings 

With revenue numbers, one must check the sources from where the company is making money. See, if the operations of the company are easily scalable? The primary revenue should be able to grow at the macro level to become a stock giving explosive returns. 

Benefits of investing in multibagger stocks 

Multibagger stocks yield tremendous returns that increase investor’s wealth. Also, purchasing multibagger stocks is not risky since such companies can withstand failures and can perform well. 

Are risks involved in multibagger stocks?

Investing in multibagger shares can throw investors into the problem as trading at high prices might be a possibility of creating an asset bubble. An asset bubble is formed when the prices of stocks or securities surges at a rapid pace without any strong fundamentals such as EPS, P/E ratio, etc. to justify the rise. When investors pin their high hopes on the stocks to perform but if the company’s products fail to perform in the market, this is where the bubble bursts resulting in massive losses. 

Thus, investors need to carefully analyse the financial statements of a company and the prevailing market situation in stock markets before investing in multibagger stocks.