Multi bagger stocks are those whose price becomes grows increasing to many times (multi times) its current price within a reasonable term. It can be a double, triple, quadruple or even ten times. So we also should have some goal and target regarding the growth and period. It is not mere speculative or manipulative growth, but more a fundamental realistic growth.
Multibaggers are not born overnight. They are fundamentally strong stocks and show indications of their strength in evaluating various ratios and parameters. They are currently undervalued stocks with high potential to grow many times. The following are some general signs that a stock can become a multibagger.
1. No external debits or very less debts. This means that the company has very low indebtedness and mostly it is own money. That means the company does not incyur much interest and borrowing charges. That also indirectly means that its assets are relatively free of encumbrance also. The money saved on interest is available to be ploughed back , and that is financial strength.
2. Return on equity, Return on capital: Any business expects on the capital employed in the business. The more return on capital, the better it is for the shareholders and promoters. So higher ratios of ROE, or ROCE can give an indication about the stock price growth and probably a multibagger rise.
3. The relativity of price and return: P/E ratio is an indicator of a stock's future growth prospects.PE is the current stcok price divided by earning per share(EPS). That will show at how many times of the earning the stock fetches its price. If the stock is having a low PE but having consistent earning growth, probably that can become a multibagger.
4. Turnover and profit should consistently grow year upon year. One possible Sign of a multibagger is that it has steadily increasing turnover and profit , more than the average for the sector itself.
5. Professional, Ethical and experienced promoters and management.
6. Market command; The Company and its product should command acceptance and leadership in the market for its product or brand. It is only such a place that can sustain and continue growth.
7. Growth prospects for the sector itself. A new change in government policy or some innovation in the company or the sector enabling more demand and growth also is needed to be a multibagger. There should be sufficient space for growth and the peak point should not have reached for the sector or industry.
Not every stock we pick from the indication will turn multibagger. However companies with strong fundamentals and the above listed points will not disappoint if we also wait with some patience.