Picking a multibagger stock for investment is an art. It has the power to make you a millionaire in a couple of decades, literally. Do you know the financial ratios you ought to be looking if you want to buy a multibagger stock? Well, here are a few of them –
The first and foremost thing you should be looking is whether the company’s share are pledged or not. And if they are how much is pledged. The logic here is if the company, itself, is safe then so will be your investment. Usually, no one will invest in a company who’s shares are pledged or, in layman’s term, mortgaged. It negatively impacts the quality of that particular stock.
When you invest in a company what do you expect in return? Obviously dividends, right. When will the company give a dividend? When it clocks a profit. So it is highly important that the company which you are choosing should have consistent EPS over a period of quarters and financial years. If the EPS is cumulatively rising, it is great for the stock price in the long run.
PE Ratio and PEG Ratio
These two are the most important ratios if you wish to buy a multibagger stock. PE Ratio calculates the amount of money you are paying for every rupee the company earns; while PEG ratio extends the PE ratio by factoring in the company’s growth.
If the company has a lower PE and PEG ratios with consistent dividends and EPS, assume that stock to be a multibagger one. If the PE multiples is cheaper than its peers, the better for the stock price.
Apart from capital intensive companies, normally, the debt ratio of any stock should never be more than 0.5. If the ratio is above that try avoiding that stock.
Logic is if the debt is higher obviously, interest payment towards the debt will also be higher. Now you don’t want to investing in a stock which spends more towards interest and debt.
Any listed company would be having a shareholding pattern. If the promoters hold over the company in terms of shareholding is good, it means that the company is expected to do great in future. It reflects confidence on the performance of the company.
So which ever stock you buy (subject to factors given above) make sure to check the shareholding pattern.
Capital Expenditure (CAPEX)
Capital Expenditure is an indicator that tells you about the sustainability and prospects of the company. When you invest in a company, you want to be parking money in those which offers innovation, growth and expansion for the future. Higher CAPEX is an indicator of exact these factors.
It tells you that the company is set to grow in new avenues and explore opportunities to increase revenue and profits. This will indirectly increase your dividends.