How to identify multibagger stock in 2025?

Multibagger stocks are like hidden treasures for investors. These small investments can turn into a fortune by providing multiple returns. However, finding these stocks is difficult and requires patience, knowledge and skill set. The coveted status of multibagger stocks is only achieved by a small number of stocks because of the dynamic market and growing economy. 

Understanding multibagger stocks

Multibagger stock refers to the stocks that provide returns several times over actual investment. For instance, if you have purchased a stock of Rs.70 and after some time it climbs up the ladder and touches a market price of Rs.700 in a relatively short period. The term multibagger is coined by the famous investor Peter Lynch. A stock that doubles in value is a 2-bagger stock, while a stock that multiplies by 10 is known as a 10-bagger stock. 

These businesses have unique characteristics such as capable and reliable investment, strong financial performance, robust cash flows, and efficient capital allocation strategy. A few examples of multibagger stocks include companies like Reliance, Asian Paints, Bajaj Finance, Eicher Motors and so on. These companies have a relatively high profit margin and thus, make it to the list of multibagger stocks. Suppose you had invested Rs.10,000 in any one of these stocks in the year 2010, you would have earned lakhs today. 

A company has a lot of growth potential if it is vocal about its vision and the process to achieve higher returns. Moreover, even small-sized companies can consist of the right characteristics of a multibagger stock, essentially if the company is a market leader in its business vertical. There are two types in which a company can grow, i.e. organic growth and inorganic growth. In organic growth, the company invests capital and creates assets from scratch. When the company grows inorganically it acquires assets and businesses of other companies. 

What is the key basis for identifying potential multibagger stocks?

Companies like Coca-Cola and Pepsi offer a durable competitive advantage by patenting the formula used to make a beverage. Hence, the company offers a unique product that no other company can copy. One of the most important questions is if the company is a big brand because brand means trust. When investors trust a stock, they are willing to pay a higher price for the same. This allows several companies to gain higher margins and consistent sales over an unlimited period.  

The second most important characteristic of a multibagger stock is reliable management. Reliable management discusses its goals clearly and then presents a blueprint to grow exponentially. 

You must also examine the company’s historical performance to see how ambitious the management is. Examine the company’s historical performance, goals, and plans, as well as the degree to which they were accomplished. Since history frequently repeats itself, management should exercise caution and step carefully if they have frequently missed their previous targets by significant margins. Additionally, one will discover that promoters hold large equity shares and very little public shareholding in the majority of multibagger stocks. Businesses that regularly dilute shares will lose market favour because this will reduce future ROE and earnings growth.

Furthermore, one of the essential characteristics among quantitative parameters of a multibagger stock is its high earnings growth. Understanding how fast a company is growing is crucial to evaluate its future financial performance. However, there are several ways to calculate earnings growth including the revenue growth model, profitability model, and so on. One of the most effective models is Earnings per share (EPS). 

A multibagger stock commands higher profit margins due to little or no competition or they have a strong brand presence which allows companies to charge a premium over and above the product market price. Thus, it follows the thumb rule that multibagger stocks must have a profit margin of above 10%. 

The most important characteristic of any multibagger stock is that it commands high free cash flows. Free cash flows are crucial for any business as it is almost impossible to change or manipulate cash flow numbers. 

Key indicators to identify multibagger stocks: 

There is no magic wand to identify potential multibagger stocks, however, there are some key indicators that help you narrow down your options. 

• Strong Financials: Companies with strong financials are the first and foremost checkpoint to identifying a multibagger stock. Thus, you should opt for companies that offer; 

1. Consistent profit and revenue growth over the years. 
2. With strong cash flow and manageable levels of debt 
3. Investing its earnings back into the company for growth
4. Showing relatively high-profit margins when compared to other competitors. 

one example of strong financials is Infosys in 1990. In its early days, Infosys consistently commanded high-profit Marmara instead of financial growth and reinvested its profit to fuel company expansion.

• Scalability: Scalability is a key characteristic of identifying a multibagger stock. A business that offers a multibagger stock has the potential to grow exponentially without increasing the cost of its products and services. Thus, check out the companies that can significantly expand to new markets, scale operations, and introduce new products without much increase in expenses. 

One of the early examples of scalability is Amazon, which began as an online bookstore but expanded to various product categories with time. 

• Innovative business model: Many multibagger stocks come from businesses that innovate within their business vertical. These companies aren’t just following the industry trends, instead th, they are leading it via unique business models or game-changing product innovation. 

Companies that solve a problem in a new way, offer something different, and introduce a disruptive technology are assured of long-term growth. For instance, companies like Apple, and Tesla. 

• Low valuation with high potential: A low value at the start of a multibagger stock’s journey allows it much more leeway to develop. These stocks are trading at a comparatively low price because most of the investors aren’t aware of them in the beginning. However, these companies or businesses are frequently undervalued in comparison to their potential for future earnings and typically represent high growth potential. 

In certain instances, stocks of companies from emerging areas (such as technology, renewable energy, or healthcare) may appear overvalued at first when compared to the other sectors, but with time, their potential for exponential revenue and profit development may make them multibagger stocks.

How to find a company’s growth potential? 

A company’s growth potential can be estimated by its revenue and earnings trajectory. Companies or businesses that constantly beat analyst estimates and report increasing revenues indicate strong financial growth. However, this requires a long-term vision by focusing on long-term trends and asking yourself “Is this company on a journey to sustainable growth?”

For instance, take the example of Tata Consultancy Services (TCS) in the early 2000s. TCS then continually beat earnings estimates and grew rapidly in the IT segment. Thus, it expanded its business globally and indicated a clear path to increasing revenues. Hence, the investors who gauged this trend early saw their money increase manifold. 

Conclusion: 

Searching for a multibagger stock necessitates the requirement of thorough research, a long-term viewpoint, and know-how of the business and the larger market that it serves. Find out new products, scalable company aspects, excellent financials, and qualified leadership. If you find this post informative, please let us know by commenting. Your appreciation encourages us to create more informative content.