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20 May 2018

STOCK MARKET--How to select a multibagger share-

Some stocks have the potential to grow and increase its price multiple times. These stocks are known as multi-bagger stocks. These can grow two-fold or multi folds. A stock that increases two-folds is known as two-bagger, while a stock that increases ten-folds is known as ten-bagger. The term “tenbagger” was coined by legendary fund manager Peter Lynch in his book "One Up On Wall Street".

Stock picking is a very subjective decision and depends on the parameters used by an individual. Though there are no rigid & well defined parameters, these are some guidelines that will focus your research
  1. Pledged shareholding - This criterion is often avoided by investors, but is one of the most important one. Pledge shareholding is the percentage of the promoters’’ holding that has been kept as collateral to banks in exchange of loans. This increases the risk of the company and brings in instability. An investor should avoid companies that have high pledged shareholdings
  2. Return of Equity - A stock price rise is proportional to the return that the stock is earning. A good return on equity is always needed for a stock price to rise and become profitable in long run. Return on Equity should be considered of last financial year as well as last 3 years.
  3. Debt-Equity Ratio - As stated above, price increase in stock is triggered by earnings. If a company is having too much debt, then the earning would flush away in paying to these obligations. Debt-Equity ratio is always preferred to be less than 50% to discover multi-bagger stocks.
  4. Sale Growth - Though different experts suggest different time period of this criteria, I personally recommend that investor should look up to 5 years of decent sales growth.
  5. Profit Growth - Having a good sale growth is not enough. It may be possible that all the revenue generated is vanished in the expenses of the company and shareholdings are left with nothing. More than 10–12% of profit growth is good enough for a stock to become a multi-bagger in future.
  6. P/E Ratio - This is a parameter that raises question. It is good to have high PE ratio as well as low. In case of picking multi-bagger stocks, it is always recommended to pick low PE ratio.

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