Why should you buy multibagger stocks?

Who among investors wouldn't want a stock with growth potential? If you are fortunate enough to find one or more multibagger stocks as an investor, that is precisely what they are.

Multibaggers are the goal of capital builders with a reasonable willingness for risk. The caveat is that a multibagger is only recognised in retrospect. It could appear to be a dangerous venture at first in a market that is overexcited. Following are the key points to keep in mind when buying multibagger stocks.

Debt recorded in books 

The ratio of the company's debt to equity must be monitored by investors. The firm may subsequently face operational concerns as a result of being overleveraged. Although the debt to equity ratio varies by industry, experts generally agree that it shouldn't be more than 0.3. Instead, keep an eye out for businesses that consistently produce a return on investment. If a company's development is solely the result of capital infusions, without innovation or a rise in ROC, default risk is likely to develop. 

Examine the revenue multiples

The value of a company's stock in relation to its revenues is known as the revenue multiple. A corporation is viewed as a cheap prospect if its revenue multiple is low.

Examine the PE ratios

Studying their present price-to-equity ratio can help you get closer to spotting a multi-bagger. The ratio between a company's stock price and earnings is known as the price-to-earnings ratio. If the PE is increasing more quickly than the stock price, this is one sign that the investment is a multi-bagger. 

Take a look at cheap stocks

A low value might not always be a bad thing. An expensive stock may cause an investment bubble to burst, leaving investors unhappy by the subsequent reduction in value. However, if a stock is inexpensive and the business has strong fundamentals, the valuation may later be changed, and investors may stand to gain. So, invest into the stock market prudently.

Have endurance 

Investors must practise patience if they want to reap the rewards of having multibaggers in their portfolio. Even at a fair price, a moment trade on a multibagger won't help you much and could not even result in larger gains. In the long term, it could be a good thing to be able to hang on to the winners. 

The key is management

Look at the company's management style, stability, mission statement, dividend and shareholder policy, and corporate governance. Look for leadership that has a track record of successfully overcoming corporate crises such as recessions and downturns. Investors may be concerned if a firm alters its business plan too frequently.

Select a robust industry 

Choose a multibagger in a sector that plans to expand significantly over the next five to ten years. It may be more harder to choose a multibagger in such a sector if growth in the business is exhibiting symptoms of having peaked or if the industry faces significant economic or political obstacles. 

Choose a business with a significant competitive edge

Look for a business that has what Warren Buffet refers to as a "economic moat," or a competitive edge that has been maintained by a business to continue generating profits over the long term. The company's growth and profitability are increased above those of its rivals thanks to the economic moat.

Conclusion

A few multibaggers can increase the total profits of your portfolio, but identifying winners requires study and technical trend analysis, which can yield greater results.