Let us start with a scenario where you have stumbled upon a potentially brilliant stock idea. It is a potential multi-bagger story.
Some of your friends have bought it and told you about it or you have read about it somewhere or you have information from sources that a big investor has recently bought into the company.

You need to build the conviction that this is indeed a very good stock/company that can be held for the long-term to create wealth.
Now the question is where do you start researching the stock idea and how do you decide in the lease possible time whether this is a potentially good company to invest in.

To effectively solve the above problem, let us turn this problem upside down.
How do I decide quickly whether the particular stock I have heard of is not worth my time? – The answer to this challenge lies in creating a set of questions -(a checklist) which can be quickly answered to determine whether to spend more time with the idea or not

In this article, I will enlist the set of questions (checklist) I use to filter the ideas that I work on. The beauty of the checklist approach is that it is a comprehensive tool to quickly address the question – “Should I spend more time researching this idea?”; “Am I better off researching some other idea rather than this one?”

The place to start is basic Financial Analysis

Sr No Parameter Criteria Value Remarks / Judgment
1 Sales Growth CAGR (10 yrs)> 15%
2 Profitability (NPM) NPM > 8%
3 Tax Payout > 30%
4 Interest Coverage > 3
5 Debt to Equity < 0.5
6 Current Ratio > 1.25
7 Cash Flow CFO > 0 (all years)
8 Cum PAT Vs Cum CFO  cCFO ~ cPAT
9 Self Sustainable Growth Rate (SSGR) SSGR > Sales Growth
10 FCF generation over 10 years FCF (10 yrs) > 0


The next step is to do some basic business analysis – return ratios and some Industry and Peer Analysis

Sr No Parameter Criteria Value Remarks
1 ROCE (10 yr avg) ROCE > 20%
2 ROE (10 yr avg) ROE > 15%
3 Comparison with Industry Peers Sales Growth > Peers
4 Increase in Production Capacity & Sales Volume Capacity/Volume CAGR ~ Sales CAGR
5 Profitable Growth Profit Growth >= Sales CAGR
6 Creation of value for shareholders from retained earnings over 10 years Increase in Mcap in 10 yrs / Retained Profits in 10 yrs > 1

It is not necessary that a company qualifies excellent on all the above 16 parameters.
However, a potential multi-bagger company will in all probability will in all likelihood qualify on most. The most critical of the parameters are

  1. cCFO ~ cPAT (10 yrs) – This is most important barometer of the ability of the company to convert accounting profits to cash and a lead indicator of presence/absence of accounting fraud
  2. SSGR (Self Sustainable Grwoth Rate) – SSGR must be greater than Sales Growth. This indicates whether the company can keep growing for a long time in the future with internal accruals without taking external debt.
    Dr Vijay Malik beautifically describes this concept over here.
  3. Free Cash Flow over 10 years – This parameter tells us whether this business is a cash guzzler or a cash generator
  4. ROCE (10 years) – Return on Capital Employed over a period of 10 years over a upward and a downward business cycle

Once the stock ideas passes this basic analysis, next we do some analysis for accounting fraud and management integrity


PS – www.screener.in is the best available free online tool to check financials of any company listed on the Indian stock exchanges



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