Return on Equity #4 Multibagger Magic Mantra

It is always good to see companies showing BIG profits!
But, how much profit is good profit?

Company A might do 10 crores of profit
Company B might do 100 crores of profit

This doesn’t always mean Company B is better than Company A
More profits does not always mean a better company!
Instead of looking at it in just absolute terms, what is more important is to look at in relative terms
i.e., for every 100 rupee of shareholder's investment what is the profit that the company is making!

Let's say Company A and B reports net profit of INR 500 crores.

In absolute terms, both companies are equal in terms of profitability.

But in relative terms,
Company A could be making 30 INR profits for every 100 INR investor’s equity.
Company B could be making just 10 INR profits per 100 INR of equity.

Return on Equity (RoE) of Company A is 30% but Company B is 10%.

Hence, Company A is a better pick than Company B

Return on Equity is a key metric in identifying a multibagger stock; RoE reveals the abili…

Debts, Loans and Mallya #3 Multibagger Magic Mantra

Debts (loans) are sometimes necessary to run a business, to acquire companies and for manufacturing capacity expansion.

But, very high debts can literally kill a company!

It is better to go to bed hungry, than to wake up in debt!

Think about this, would you invest if Vijay Mallya started a new venture? Lol 😂

Stay away from companies whose debt/equity ratio is more than 1
In fact, I personally wouldn’t invest if debt/equity ratio is more than 0.5

Let's take an example of a company with good debt/equity Ratio: Maruti Suzuki (link)

Now, let's take a bad example: Idea Cellular (link)

Worst Case ScenarioThere are few companies with negative debt/equity ratios, like Suzlon (link).
Stay away from such companies too!
Negative debt/equity ratio means the company's net worth is negative.
Very few bankers extend loans to such a company with a negative net worth unless there are extenuating circumstances, and there are assets that the company can pledge.

To summarize, while picking a multibagge…

Shareholding Patterns - #2 Multibagger Magic Mantra

Shareholding pattern in simple words explains how much of the company's ownership is held by the promoters (Owners of the company) and how much is held by the public shareholders.

Imagine a company where promoters (Owners) themselves are selling out their own stocks!

This is a BIG red signal!
How can outside people be confident about the stock’s future if the promoters themselves are exiting the stock!

On the other hand, if promoters are super-confident of the company’s future revenue and profits growth they themselves will buy more stakes from the open market. They are betting their own money on the company's growth! Imagine how confident they would be about the potential ahead of them!

This is a BIG green Signal!
A quick check can help you understand the shareholding patterns and make a decision.

Here is a good shareholding pattern of a company - Maruti Suzuki (link)

Here are the shares pledged (that can be sold by promoters anytime) of Maruti Suzuki (link)

Here is a bad shareholding…

The Growth Story - #1 Multibagger Magic Mantra

First and foremost you need a company which is growing for picking a multibagger!

I know, this is a no brainer but there are thousands of people investing in companies making huge losses year after year. They are hoping for a turnaround story, but never happens! Example: Suzlon

I would suggest you to stay away from such companies.

You need stocks which are growing both in terms of revenue and in profits.

Revenue and profits may not always dance together 😜

Case 1: Many companies are growing both in terms of revenue and profits. This is the kind of companies you should look out for.
Case 2: Many companies are making losses in terms of both revenue and profits. I would suggest you stay away from such companies.

Case 3: Few companies are growing in revenue, but profits are NOT growing, due to unnecessary expenses or higher raw material costs.

Case 4: Few companies are growing in profits but revenue growth remaining stagnant. This sounds very odd and unusual, but this is actually possible because…

5 Multibagger Magic Mantras

Ever wondered about the secret recipe of a great stock from Warren Buffett?
Ever wondered what drives the stock price to grow steadily for years to become a multi-bagger?
We hear all day stock suggestions from SMSs, TV and from apps/websites like MoneyControl and BloombergQuint.
World around us has a lot of noise in terms of stock suggestions.

Can you find a multi-bagger from this hell of suggestions?
Can you decide if the stock suggested is a great stock or not?

Here are 5 simple n easy mantras to find out just that:
The Growth Story (link)Shareholding Patterns (link)Debts, Loans and Mallya (link)Coming SoonComing Soon

This is a five-part series of blog posts, please stay tuned for all 5 posts.

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