Multibagger

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%