(8) Capital Requirement Of Company
It is one of the most crucial ways to select true multibagger stocks quickly. Capex or capital expenditure is the money used by an organization or firm to acquire, maintain or upgrade its productive assets.
Some of the most common productive assets of a corporate entity include real estate property or land, industrial buildings, factories, vehicles, technology, equipments, & many more.
Capex is usually needed to undertake new projects or investments by the firm. Ideally, a potential multibagger should generate maximum possible returns through minimum capital expenditure.
This corporate efficiency can be determined by looking at 2 factors or ratios such as ROE (Return On Equity) & ROCE (Return On Capital Employed).
Investors should look for companies with ROE > 20 as well as ROCE > 20. It is something necessary for stocks to become multibaggers in coming years.
Moreover, return ratios should be reflecting an increasing trend with time. It should never be flat or be on a falling trend.
On the other hand, companies with lower return ratios are unlikely to reward shareholders in the long run. These underperforming companies should never be on your radar.
Additionally, businesses that are capital intensive have fewer chances of being multibaggers. Investors can usually find capex directly by looking in the cash flow statement of the underlying company.
However, in absence of cash flow statement, one can also calculate capex by using capex formula along with income statement & balance sheet:
Capex = PP&E (current period) – PP&E (prior period) + Depreciation (current period)
You just need to follow these steps:
(a) Locate depreciation & amortization on income statement
(b) Locate current period property, plant & equipment (PP&E) on balance sheet
(c) Locate prior period PP&E on same balance sheet
(d) Use the above mentioned capex formula to calculate it.
(9) Market Capitalization
It is one of the most significant ways to select true multibagger stocks quickly. Market capitalization, also known as market cap, is the market value of a publicly traded company.
It is calculated by multiplying current share price of underlying company with its total number of outstanding shares. Market capitalization changes along with change in share price of underlying company.
Generally, companies with a small or medium market cap are more likely to grow faster as compared to those with a large or mega market cap. It is due to the fact that a small or medium company has more scope of growth when other parameters are met.
Additionally, it is easier for a company with small market capitalization to double or triple their net worth within a short time. On the other hand, a company with large or mega market cap will not be able to grow at an enough rate to boost its share price for multiple returns.
However, it doesn’t mean that large cap companies can’t become multibaggers at all. But, small & mid-cap companies are found to have greater chances of becoming multibaggers with time.
Therefore, investors are always advised to look at small but healthy companies at a fair price when hunting for multibaggers.
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