The term “Multibagger” was first used by an American investor and mutual fund manager, Peter Lynch. He used this term in his book One Up on Wall Street to explain those stocks that can multiply an investment over time. However, a Multibagger stock is a stock that can ensure more than 100% growth of its original purchase price.

When a small-cap or mid-cap company’s stock increases its value by 200% or more, they are called a multibagger stock. If a stock brings 2x return over time, it is called a 2-bagger, if it brings 3x return, it is a 3-bagger, and 5x is a 5-bagger. Even large-cap companies can become multibaggers. Appearing as the dream of every investor, these stocks are like hidden treasures waiting to be discovered. Having a large young population with rising incomes, India now holds one of the fastest-growing economies in the world. Plus, the demand for products and services is increasing at an ever-increasing rate. So, the chance for small or mid-cap companies to become multibaggers is increasing.

High ROI

Try to find out a company that is generating good returns from the invested capital by selling products or services. Such a company can give healthy competition to its nearest competitors and can potentially create considerable value for its shareholders. ROCE and ROE are two important terms in this regard.

ROCE or Return on Capital Employed, tells us how well a company can use its capital to generate operating profits, while ROE or Return on Equity tells us about the return generated on shareholders’ equity. As an investor, you should not look at these ratios separately. Look at ROI, or Return On Investment.

Future-Ready Products and Services

Are the products and services remaining relevant five or ten years from now? If you are looking for a good company to invest in, you should ask this question. The company you are going to select should have future-ready approaches in developing products and services.

A company with products and services that are relevant to future customer needs is likely to be a potential multibagger. Some of the trendy domains are renewable energy, artificial intelligence, electric mobility, and semiconductors. However, a company that continuously adapts to technology and considers changing consumer behaviour has a better chance of sustaining growth.

Consistent Revenue Growth

Consistent revenue growth is another key element in this agenda. Try to find out which companies have been able to grow their sales percentage over the last few years. A company is growing its sales percentage over the last few years, which means it is inviting its customers to buy more of its products or services. Also, it ensures increasing demand for products or services.

As an investor, you should examine the revenue growth over 3 or 5 years. Don’t consider one or two quarters with good results. Interestingly, revenue growth is not enough to select a good company. You should determine whether the company is profitable and maintaining healthy cash flow.

Growth In Profit Margin

Growth in sales has become more valuable if a company can convert a larger portion of those sales into profits. A good profit margin provides insight into a company’s operating efficiency and competitive position. If you find a company that has a sustainable margin and continuously improving profitability, it has a better chance to grow. Hence, you should analyze net profit margin and operating profit margin for the last 3 or 5 years.

Product Innovation and Technology Adoption

Innovation is a powerful tool that defines the growth chance of a company. So, companies that focus on developing new products/services, improving existing products/services, or using trendy technology in developing new products/services have a higher chance to sustain in this competitive market.

The adoption of technology is another entry barrier, as technology can help businesses reduce costs, improve productivity and provide better services to customers. Some of the trendy technologies are cloud computing, artificial intelligence, and digitalization.

As an investor, you should not take a decision based on the announcements; think beyond announcements. You should also ask, is the new technology creating better products and ensuring higher productivity?

Manageable Debt

Most businesses indeed grow with the help of debt, but that should be manageable. Excessive debt can create problems for a company to grow as multibagger stock. Paying too much interest can become a major burden for any business at any level.

So, you should check debt-to-equity, interest coverage, and cash flow while researching a company. If the cash flow is high, company management can invest in expanding capacity, developing new projects, and dealing with temporary downturns.

However, a debt-free company does not mean that it is better than a company with manageable debt. Borrowing money is good if the borrowed money is invested wisely to generate returns more than the cost of borrowing.

Strong Cash Flow

As we said earlier, a strong cash flow is another key indication that a company is investable. If a company is facing difficulty in collecting payments from its customers, it has a weak cash flow rate. On the other hand, if a company is continuously investing large amounts of money in working capital, it is not an investable company.

A strong cash flow indicates that the business is generating actual cash from its operations. This means the company has more flexibility to repay debt, expand capacity, invest in research and development, and acquire other potential businesses.

Low Promoter Pledging

A business with high promoter pledging is risky from the growth point of view. High promoter pledging becomes problematic for that company when the share price falls sharply. Promoter ownership indeed provides confidence to investors, but the ownership proportion should be low. Also, a visionary investor should study the changes in promoter ownership and corporate-governance indicators when researching the future growth of a business. Therefore, you should go for low or declining promoter pledging while selecting a company having the potential to become a multibagger.

Disclaimer:

Unsold70 publishes research-based articles to help readers understand businesses and the stock market. These are not investment recommendations as past performance does not guarantee future results. You should perform your own research and seek advice from a SEBI-registered financial advisor before making investment decisions.