Every investor wishes to own multibaggers in his or
her portfolio, but it is not an easy task to find such stocks. Primarily, there
are three factors one needs to look at when scouting for these gems. The
presence of all three is imperative if you are looking to identify long-term
wealth creators in your portfolio. Let us look at them below:
High Growth + High Return on Capital Employed (ROCE)
For a stock to turn multibagger, the company must consistently grow its earnings at a high rate and must achieve the same
without deteriorating its returns on capital employed. The table below
highlights few multibaggers that have consistently compounded their earnings at
a remarkably high ROCE.
|
Stock Name |
5Y Earnings CAGR% |
Average ROCE |
5Y Return CAGR |
|
Honeywell |
28.4% |
27.3 |
31.5% |
|
Divi’s Laboratories |
17% |
30.4 |
48.7% |
|
Relaxo Footwears |
24.9% |
27.2 |
34.1% |
|
Jubilant FoodWorks |
41.3% |
24 |
36.1% |
|
APL Apollo Tubes |
28% |
25.3 |
50.9% |
Growing Cash Flows
The cash flow of a company is the most accurate
yardstick to assess a company’s performance. The cash flow statement determines
the ability of the company to grow its earnings in the future. If the company is
not able to generate cash from operations, it will have to repeatedly tap
markets to raise money either in the form of debt or equity capital to grow its
business.
Multibagger companies, apart from compounding profits,
also consistently compound their operating cash flows (cash profit -
incremental working capital) enabling them to grow at a fast-paced year after
year. Companies that may perform well on the earnings and cash flow front but
not on the growth front may be in a stagnant phase of their existence and hence
might not earn returns for investors.
|
Stock Name |
5Y FCF CAGR% |
Average ROCE |
5Y Return CAGR |
|
CRISIL |
11.7% |
43.4 |
12.2% |
|
Castrol |
5% |
56.8 |
-14.2% |
|
Swaraj Engines |
-7.6% |
48.2 |
-2.2% |
|
Colgate-Palmolive |
12.3% |
98.4 |
8.7% |
|
Accelya Solutions |
0% |
25.8 |
-8.3% |
Prudent Allocation of Capital
Finally, we come to the point of prudent allocation of
capital. As we now know, wealth creation is all about long-term compounding of
earnings and cash flows. Companies that tick the above two criteria tend to
generate vast amounts of cash and capital but how a company allocates that cash
becomes the key differentiator between a good company and a great multibagger stock.
|
Stock Name |
Base Year ROCE% |
Incremental 5Y ROCE |
5Y Returns CAGR% |
|
Alkyl Amines Chemicals |
26% |
64.9% |
74.4% |
|
MindTree |
33% |
48.6% |
57.6% |
|
Jubilant FoodWorks |
20.9% |
85.6% |
36.1% |
|
TCS |
52.1% |
111% |
25% |
|
Castrol |
177.5% |
-13.7% |
-14.2% |
|
Accelya Solutions |
112.6% |
-36.3% |
-8.3% |
