What is a multibagger Stock and How to identify Multibagger Stocks?
What Is MultiBagger Stocks? : Multibagger Stock is often not defined correctly some people think that they will buy a stock at 100 and he go very quickly to 150 and that 50% gain in a short span of time makes it a multibagger.
That actually is not the classic definition of a multibagger a multibagger stock is what one which multiplies its value several times over the period of time if you buy a stock at hundred rupees and that stock goes up to 800 rupees over the period of six seven years it is multiplied eight times its original price making it a multibagger, that is the classic definition.
How to Pick MultiBagger Stock ?
>> Is it an easy thing to pick a Multibagger Stock not at all so the first thing to understand is that you should not try and play for very short-term gains one always keeps on hearing stories of how a stock went up 50% in in three days that sometimes happens but mostly it does not the more important lesson in investing is to think about the power of compounding.
Here is an example : If first stock multiplies its earnings growth by 25 percent every year basically a stock X keeps growing its earnings by 25% year after year after year then its profits will be 10 times its profit in the year 1 after 10 years so if the profit of a company was hundred rupees and it kept keeps on growing at 25 percent every year then in year 10.
The profit will be a thousand rupees and there is no reason to believe that that stock will also not have gone up ten times when his profit goes up ten times because stock prices usually follow the trajectory of earnings actually.
If a company grows its profits at 25 percent over ten years chances are that the other variable which affect stock prices which is the pea multiple will actually also expand and you’re ten times growth in earnings might actually lead to a 12 or 15 times growth in the stock price making it an even bigger multibagger.
So the thing to keep in mind is not to think of excitement that’s some suddenly over a four-day period a stock price will multiply and you can tell your friends at parties that you bought a multibagger Stock the thing is to try and identify companies which are steadily growing their earnings at 25% plus and in doing that are maintaining a very high and healthy return on capital employed.
Because the moment accompanies return ratios return on equity or return on capital employed is higher than its cost of capital the cost at which its it borrows money the chances are that it’s creating a lot of wealth so two things to keep in mind healthy profit growth an extra in excess of 20% plus annually and a good roc e or a good return of equity preferably above 18 to 20% if you have both over a sustainable period of time you have the makings of a Multibagger Stock on your hands.
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