The simplicity of stocks is that , if you work hard and control the psychological factors of greed and fear .One can easily achieve his financial goals over a period of time. The best way to multiply money is to invest in small cap stocks . with certain qualities .Here I am presenting two approaches to pick multibagger stocks
Graham Buffet Formula to pick winning multibagger stock
Step 1: Filter out all companies with sales less than Rs 250 cr. Companies with sales lower than this are very small companies and might not have the business stability and access to finance that is required for a safe investment. This eliminates the basic business risk.
Step 2: Filter out all companies with debt to equity greater than 30%. Companies with low leverage are safer.
Step 3: Filter out all companies with interest coverage ratio of less than 4. Companies with high interest coverage ratio have a highly reduced bankruptcy risk.
Step 4: Filter out all companies with ROE less than 25% since they are earning less than their cost of capital. High ROE companies have a robust business model, which generates increased earnings for the company typically.
Step 5: Filter out all companies with PE ratio greater than 25 since they are too expensive even for a high-quality company. This enables us to pick companies which are relatively cheaper as against their actual value.
HOW TO PICK MULTI BAGGER STOCK according to BASANT Mhesharis
1) Invest in companies that have a return on equity (in excess of 30 per cent) and that pay regular dividend. These two factors are a sign of sound management, he says.
2) Invest in companies with high sales growth: Companies that generate 25-30 per cent sales growth for 5-6 years are unlikely to be loss-making propositions, he says.
3) Never buy into a company which is not a sector leader.
4) Buy companies, which are trading at market price/face value of more than 100.
5) Companies with debt can also be good bets provided the growth in debt is significantly less than growth in sales.
Look at the below table for some small caps ten year before which has given a wonderful return
Change in share prices over 10 years
Graham Buffet Formula to pick winning multibagger stock
Step 1: Filter out all companies with sales less than Rs 250 cr. Companies with sales lower than this are very small companies and might not have the business stability and access to finance that is required for a safe investment. This eliminates the basic business risk.
Step 2: Filter out all companies with debt to equity greater than 30%. Companies with low leverage are safer.
Step 3: Filter out all companies with interest coverage ratio of less than 4. Companies with high interest coverage ratio have a highly reduced bankruptcy risk.
Step 4: Filter out all companies with ROE less than 25% since they are earning less than their cost of capital. High ROE companies have a robust business model, which generates increased earnings for the company typically.
Step 5: Filter out all companies with PE ratio greater than 25 since they are too expensive even for a high-quality company. This enables us to pick companies which are relatively cheaper as against their actual value.
HOW TO PICK MULTI BAGGER STOCK according to BASANT Mhesharis
1) Invest in companies that have a return on equity (in excess of 30 per cent) and that pay regular dividend. These two factors are a sign of sound management, he says.
2) Invest in companies with high sales growth: Companies that generate 25-30 per cent sales growth for 5-6 years are unlikely to be loss-making propositions, he says.
3) Never buy into a company which is not a sector leader.
4) Buy companies, which are trading at market price/face value of more than 100.
5) Companies with debt can also be good bets provided the growth in debt is significantly less than growth in sales.
Look at the below table for some small caps ten year before which has given a wonderful return
| Company | Dec-04 | Dec-14 | Change | ||
| Mayur Uniquoters Ltd. | 1.5 | 428.7 | 28,174% | ||
| Ashiana Housing Ltd. | 1.0 | 198.9 | 20,370% | ||
| Kitex Garments Ltd. | 2.8 | 510.1 | 17,923% | ||
| Rollatainers Ltd. | 3.7 | 460.0 | 12,372% | ||
| La Opala RG Ltd. | 3.7 | 453.9 | 12,334% | ||
| Hawkins Cookers Ltd. | 33.6 | 3,687.1 | 10,890% | ||
| Cera Sanitaryware Ltd. | 16.4 | 1,779.7 | 10,785% | ||
| Butterfly Gandhimathi Appliances Ltd. | 2.5 | 221.8 | 8,770% | ||
| Atul Auto Ltd. | 7.7 | 675.7 | 8,725% | ||
| Vinati Organics Ltd. | 5.7 | 430.1 | 7,507% |
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