Multibagger stocks are equity shares in a firm that can provide returns that are several times larger than the cost of purchase. In other words, such equity equities reward investors with a return of above 100%. Multibagger stocks are great investment possibilities since they are located in high-growth industries with a lot of room for expansion.
They are long-term investments that do not generate immediate returns when acquired. A fundamentally good small-cap company with outstanding management and a long-term strategy will grow into a multi-bagger over time. But how can you tell whether a stock is a multibagger?
Factors to look out while identifying a Multibagger stock
Any stock with the ability to be a multi-bagger should have knowledgeable and trustworthy management. Analyse the managerial and promoter holdings of the organisation to discover its true potential. Governance policies, pledging of shares, diversion of cash to other enterprises or for personal gain, obligation discipline,board independence, and financial concerns all contribute to determining the management team's strength.
When a corporation produces money, a shareholder benefits. When you examine the earnings of a multibagger stock, you will often notice a tremendous rise in the company's earnings. The best indicator of a company's earnings growth is its earnings per share (EPS). It can be calculated using the following formula-
EPS= Net Profit/Number of outstanding shares
A company's long-term survival should be considered in addition to earning above-average profits. Gaining a competitive advantage can help a company achieve long-term, high-profit growth. Securing a significant market share through a huge brand visibility, lower input prices, and a diversified product variety may provide a company a competitive advantage.
While it may be tempting to look for multi-bagger stocks, traders should confine their investments in potential multibaggers to a minimum level so that any losses or inadequate returns do not severely impact the entire portfolio.