Looking for a multibagger? Here are 5 key metrics to spot high-potential stocks | Stock Market News

Investors chase returns – and that’s what makes them euphoric about equities and multibagger stocks in particular. Sample this – if you had bought shares of TCPL Packaging Ltd worth ₹10 lakh 16 years ago, your investment would now be worth nearly ₹20 crore. A multi-bagger stock can be a wealth-creating machine, but identifying one is quite challenging. 

While there is no certain formula to pick a multibagger, here are 5 key metrics that can help you spot potential ones.

5 key metrics to identify multibagger stocks

1. Earnings growth: Consistent earnings growth is the first key indicator for a potential multibagger stock. Companies with a compounded annual earnings growth rate (CAGR) of 15-20 per cent in the last 3-5 years and scalable business models serve as multi-baggers with increasing market demand. 

“Revenue growth should also be steady. If sales are rising but profits remain stagnant, it could indicate high operational costs or inefficiencies. This too should be looked at with respect to depreciation increase, as new capacities come online,” said Mayank Mundhra, FRM – VP Risk & Head of Research at Abans Group. 

2. Low debt-to-equity ratio: The debt-to-equity (D/E) ratio is a key metric that compares the company’s current debt with its equity to analyse risk and the firm’s financial health. Businesses with low (D/E) ratios are financially stronger and face low risks during an industry downturn. 

3. Healthy cash flow: Free cash flow is another key factor through which any firm can re-invest money to expand the business, take debt reduction measures, or grant dividends to shareholders to attract more investment. 

4. Valuation game: Understanding the valuation game is essential for any new investor as market participants tend to overpay for high-growth stocks which can turn out in lesser or “disappointing returns”. 

If investors want to understand the valuation game, the key metric is the price-to-earnings (P/E) ratio, which they use to compare their performance with those of their industry peers. This metric also serves as an indicator to identify whether a stock is expensive or cheap at the current market price (CMP). 

“Values below 1 suggest that the stock is undervalued relative to its growth potential,” said Mundhra. 

5. Other financial ratios: Other advanced metrics are EBITDA (EV/EBITDA) and price-to-book (P/B) ratio, which help investors compare a company’s valuation with its assets and earnings over a specific period. 

Avoid Sympathy Play

Manish Jain, the Director of Institutional Business (Equity and FI) at Mirae Asset Capital Markets, called out an investor strategy called a “Sympathy Play” and explained how new investors should avoid it.

“A Sympathy Play is a stock in the same industry group that is bought in the hope that the lustre of the real leader will rub off on it. But the profits of such companies usually pale in comparison. The stocks will eventually try to move up ‘in sympathy’ with the leader, but they never do as well,” said the stock market expert. 

Disclaimer: The views and recommendations above are those of individual analysts, experts and broking companies, not of Mint. We advise investors to check with certified experts before making any investment decision.