Are you looking for a long-term winner — a multibagger stock? It is simple! Buy shares of a company with strong fundamentals and consistently high financial performance.
To evaluate a company’s efficiency and the quality of its management, the two key financial ratios to be keenly observed are return on net worth (RoNW) and return on capital employed (RoCE). Besides, price-to-earnings ratio could be used to determine the market price of a company’s stock and to compare it with peers’ in the same sector. Price to book value measures the value of shareholder's ownership in the company.
While earnings yield — the quotient of earnings per share divided by the share price — needs to be seen to compare directly against the returns offered by alternative investments such as interest on a bond or savings account, debt-to-equity ratio could measure a company’s financial leverage. A high debt-to-equity ratio generally means that a company has been aggressive in financing its growth with debt. This could result in volatile earnings because of additional interest expenses.
TTK Prestige, a leader in the Indian kitchenware market, tops the list of multibaggers, with compound annual returns of 71 per cent in 10 years. In other words, Rs 1,450 invested in 2004 was valued at Rs 2.94 lakh on March 31, 2014. The company has benefited from market growth, driven by rising consumer spend, evolving lifestyle preferences and broad demographic trends.
TTK’s product range and distribution have complemented the strong brand, helping it clock a revenue CAGR of 24 per cent in 10 years. The profit has grown at an even higher CAGR of 66 per cent, backed by its premium products and a debt-free status, from a debt-to-equity ratio of two in 2004. The efficiency and the quality of its management measured from consistently high RoNW and RoCE helped it become the most valuable company in the past decade.