How can we identify multibagger stock only using P/E ratio,

PEG, Sales and Profit growth and other financial factor?

There are a lot of other factors that need to be assessed before coming to the conclusion
that a stock is a future multi-bagger. P/E ratio is not everything. Every business is different
from another.

Below are a few factors that should be there just to screen fundamentally good stocks so
that you can analyse them further.

1. Return on equity should be more than 12 since last 3 years.

2. Return on Capital Employed should be more than 15 since last 3 years.
3. Debt equity ratio should be less than 1.
4. PEG ratio should be less than 2.
5. If the profit margins have been improving since last 3 years, then it is an added
benefit.
6. Decreasing Debt Asset Ratio since last 3 years is also an added benefit.
7. Study the working capital management. Is it an advantage for the business or
is it creating more liabilities?
8. Positive Free Cash Flow. If the Free Cash flow is improving since last few years,
then it is an added benefit.
9. 3 years Average Sales growth of more than 15%
10. P/E should not be in triple digits.
11. CFO / Ebitda should be not be consistently less. This tells you about the quality
of the cashflows.
The above fundamentals do not apply to Banking and Finance Sector. Below are the
Fundamentals for Banking and Finance Sector

1. ROCE is generally very high.

2. ROE need not be more than 12. However make sure that it is not a negative
ROE.
3. Debt equity ratio is generally very high. So do not bother about this ratio.
4. Look at the loan book growth. Loan book is the backbone of any Bank or NBFC.
5. NPAs should be less or decreasing.
6. Improving CASA Ratio.
All the fundamental factors written above for Finance or Non finance sectors need to be
understood correctly. If you have difficulty in understanding, then research as mush as
possible. The above factors DO NOT GUARANTEE THAT THE STOCK WILL BE A
MULTIBAGGER. These factors can only screen a bunch of stocks for further analysis.
If the Fundamentals of a business are good, then you have to look at the price at which you
are buying the share. Learn DCF analysis (Discounted Cashflow Analysis) and calculate the
intrinsic value of the business. Then you will arrive at the intrinsic value of one share.

This will mean that if the business maintains the same rate of growth for its cashflows and
other fundamentals, then within a few years it will achieve its intrinsic value.

After this valuation method, you will be able to list down probable multibaggers from the
screened stocks.

What could be concluded from a company with high ROE but

low EPS?
Thank you so much for this question. Warren Buffett ‘the Sage of Omaha’ focuses on Return
on Equity ROE rather than Earnings per Share EPS in companies he is invested in or want to
put money down for.

He and other finance experts understand that the ROE of a business can be distorted by
leverage and therefore will give a false flag on the health of the company. Warren Buffett
understands this so he examines leverage separately.

ROE can also be figured as the sum of the past 5 or 10 years earnings. However, you should
be careful not to annualise the results of a seasonal business in which all of its profits is
booked in one or two quarters or years. This could give a discrepancy between the ROE and
EPS.

When EPS is increasing year to year, does it mean that the

company has growth potential? When EPS is growing year to
year, is it worth for investors to invest in?

You need to examine the cause of the EPS increase to determine if the company has growth
potential.

Look at the following key factors -

1. See if the company reduced the number of shares outstanding. This causes the
EPS to increase, but you cannot conclude that the company has growth potential.
2. Check if the company raised debt to fuel growth. If the DE ratio has increased
over the period of the EPS increase then look further to see if the company has
 raised debt or decreased equity. If the company has raised substantial debt
resulting in DE ratio shooting above 1, then this is not desirable. You would want
the EPS growth to come through internal accruals I.e. using cash generated from
operations and not through additional funding.
3. Check if the cumulative earnings (Net Income or Profit After Tax) exceed the
cumulative CFO (cash flow from operations) over the period of EPS increase. This
indicates that the company seems in a hurry to recognize profits and is unable to
convert reported profits into cash (money is getting stuck in working capital).
Do not intend to overwhelm you, but one other key thing that you should check is
company’s ability to generate Free Cash Flow (FCF), which is the surplus cash left after
meeting day to day operations and CapEx needs. FCF = CFO - CapEx.

If the company has not raised significant debt (and kept its DE ratio in check), cumulative
PAT has not exceeded cumulative CFO and also generated positive Free Cash Flow, then the
EPS increase is not fictitious and it does indicate the company has growth potential.

Finance also gives a formula for expected growth = re-investment rate * return on capital.
But more on that later.

Hope this helps!

Edit 1 - I should have also mentioned that you need to check sales growth and operating
margin. I figured it being to obvious to mention and focused my answer strictly only on EPS
growth.

What is the difference between Basic EPS, Diluted EPS and

cash EPS. What does its increase or decrease indicates?
Basic EPS (most widely used)

It is the EPS which express the accrual based earning:

 which are earned and received.

 which are earned but not received (unpaid).
And doesn’t include the earnings:

 which are not earned but received (advance).

It clearly shows the earning which is generated in the current year operations.

Diluted EPS (More transparent way)

This is simply the dilution of Basic EPS.

Many stocks obligations are not consider in basic EPS like sweat equity, stock options, ESOP
etc which can arise in foreseeable time or on the will of the receiver.

In simple words, the options which are convertible to equity (common stocks) which
increase the number of common stocks eventually decreasing the EPS.

Diluted EPS will be always less than or equal to basic EPS.

Cash EPS (traditional way)

It’s the EPS which express the cash based earnings:

 which are earned and received.

 which are not earned but received.
And doesn’t include the earnings:

 which are earned but not received.

Personal note: Different types of earnings are just a different point of view to analyse
company’s health and plays crucial role at their own place.

Basic EPS is good when you are looking for current year earnings but sometimes company’s
may affected if the large part of earning is not cashed out.

For example, Inox Wind have good EPS but still its prices are deflating due to high levels of
trade receivables (i.e. the sales which are not cashed out). So despite of high basic earnings,
company may go out of funds for its core operations if the TR are not cashed out on time.

So concluding your investment decision just on basic EPS is not sane. Analyse a company
with many point of view.

If a company is showing good 5 years CAGR profit but not

good growth of sales, then should we invest in that stock?
What is its significance?
I will give my view in short.

In P&L statement the one number that is most difficult to manipulate is SALES. From
business perspective also its the SALES that is most difficult to do. And end of day
businesses exist to do SALES.

PROFIT is the ultimate objective. However, SALES drives everything. Someone said -
“Businesses are supposed to do only two things - Sales & Innovation.”
In P&L statement SALES is the top figure. Rest everything falls below it. In essence, SALES =
Sum of all the figures below it. It’s the company’s SALES from which various stakeholders
get their share - employees get their salary, suppliers get their payments, consultants get
their fee, government gets its taxes, and finally the shareholders and promoters get their
dividends and profits. So SALES is the most important figure. It basically is the sum total of
everybody’s income from the business.

For the same reason, among all the stakeholders in the value chain it’s the CUSTOMER who
is the most important in any business. Why? Because what he spends is called the
company’s SALES. Without him spending SALES can not happen. He sits at the top.
Whatever he spends becomes the SALES of the company. And from the SALES of the
company everybody down the value chain gets his/her share, including the government and
the shareholders. After customer it’s the shareholders (particularly the promoters) who are
the next important stakeholders in any business - because they absorb the risk. What’s the
risk? Risk is that the SALES may not be sufficient to compensate everybody involved - and in
that situation it’s the shareholders who absorb the deficit (thru negative PAT, or what we call
loss). When the company is making loss then it’s only the shareholders who don’t get
anything, rest all get paid more or less. Well, the government also doesn’t get paid - but
that would be too cruel on the part of government to be asking for its pie even in a loss
making company. :)

Deviated a bit from the original question. But in short - SALES is the most important and the
most believable figure. Net profits are the ultimate objective for any shareholder but it must
be achieved thru good & healthy SALES. If SALES is going down then the business will go
down eventually, no matter how efficient the business may be operationally.

Happy Saving & Investing! … for Financial Freedom & Wealth Creation! … it’s never too late
… it’s never too early!!

“Money is better than poverty, if only for financial reasons.”  - Woody Allen

If a company is not making sales but still growing profits, it usually means that its profits are
largely contributed by non core business (that is major profit of the company is coming
from other sources such as sale of assets like land, shares, interest income etc), Companies
with sustainable profits, have growing sales and profits.

To know the source of profits of a company look at company’s operational revenue and
operational profit data, if company is not making any progress on that front, you should
stay away from the company as future profitability of the company is doubtful.
You can also use cash flow statement of the company to see how the company is
generating cash flow. Look at the “(Net) Cash flow from operating activities” data, if
company is posting good and progressive numbers, its a positive sign. Cash flow statement
is a better measure of company’s health as it is hard to manipulate cash earnings, while
sales and other numbers can be manipulated.

What happens to a public company when its stock does not

grow in 5 years but has about 6% revenue growth every year?

Nothing.(I am assuming that you mean stock price did not move for 5 years)

There could be any number of reasons why stock price will remain same for years

1) You wrote about 6% revenue growth but did not mention profit growth. So we do not
know whether top line is really flowing to bottom line or not.

2) Also if the company is wildly over valued 5 years ago, it may not have moved for 5 years
to burn off excessive optimism.

3) Or there is a excessive pessimism in the markets for 5 years hence price did not move
even though the company is improving profits

4) or Company is diluting its equity by increasing share count hence price remained the
same even though profits increased.

—Vamsee

How does a decrease in EPS affect an investor?

What Is Earnings Per Share?

Earnings per share is a measure of how much profit a company has generated. Companies
usually report their earnings per share on a quarterly or yearly basis.

Calculating earnings per share

Earnings per share is the portion of a company's profit that is allocated to each outstanding
share of its common stock. It is calculated by taking the difference between a company's net
income and dividends paid for preferred stock and then dividing that figure by the average
number of shares outstanding.Let's say a company has a net income of $20 million and pays
out $2 million in dividends to preferred stockholders. Let's also say that company has 10
million shares outstanding for the first half of the quarter and 12 million shares outstanding
for the second half, or an average of 11 million shares. In this case, here's how we would
calculate earnings per share:$20 million - $2 million = $18 million$18 million / 11 million
shares = $1.63/share Thus this company's earnings came to $1.63 per share.

Diluted earnings per share

While the basic earnings-per-share formula only takes a company's outstanding common
shares into account, the diluted earnings-per-share calculation takes all convertible
securities into consideration. A company might have convertible preferred shares or stock
options that could theoretically become common stock. If this were to happen, the result
would be a reduction in earnings per share, and as such, a company's diluted earnings per
share will always be lower than its basic earnings per share.Using our example, let's say the
company above has issued 2 million convertible preferred shares. In this case, the new
earnings per share would be $1.38 ($18 million divided by 13 million).

Significance of earnings per share

Earnings can cause stock prices to rise, and when they do, investors make money. If a
company has high earnings per share, it means it has more money available to either
reinvest in the business or distribute to stockholders in the form of dividend payments. In
either scenario, the investors win.

Limitations of earnings per share

When a company's earnings increase, it's an indication that the company is doing well
financially and that it's potentially a worthwhile investment. But as a measure of a
company's financial health, the earnings-per-share calculation has its limitations. Because
companies have the option to buy back their own shares, they can improve their earnings
per share by reducing their number of shares outstanding without actually increasing their
net income. In this regard, companies can essentially manipulate investors into thinking
they're doing better than they actually are. Furthermore, earnings per share does not take
factors such as a company's outstanding debt into account.Finally, earnings per share does
not consider the capital needed to generate the earnings in question.

If two companies report the same earnings per share but one uses less capital to bring in
that income, that company is probably managing its resources better than its counterpart.
However, that fact wouldn't be reflected in its earnings per share. Many investors fear
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286 views
Why is ROE more important than EPS when evaluating an
investment?
I don’t think one is necessarily better than the other, though EPS is a lot simpler. Perhaps
the equations best illustrate this:

EPS=profitshareEPS=profitshare
EPS offers a (somewhat) standardized way of looking at share price, especially if you
combine it with an EPS “multiplier” (also called P/E, for the ratio of price/earnings). That is,
once you know how much profit there is per share, how much are you willing to pay each
dollar of that profit? $23? $47? $12? That is going to depend primarily on your estimates of
how those profits are going to grow over time (you will pay more for the expectation of
growth), and of how risky that profit is (you will pay less for companies where you are less
confident in their future profits). So it’s an easy way to eyeball a valuation target: $2.23
expected EPS and PE of 17 for company peers gives you a $37.91 stock price valuation. If
the stock price under that, buy; if over, sell. Crude but effective.

Note that the only financial figure in the ratio is profit; that is, it tells you nothing more than
profit, standardized per share.

ROE=profitassets−debtROE=profitassets−debt
ROE does a different set of tasks. The numerator is the same (profits), but the denominator
focuses on shareholder equity (the total capital provided by shareholders, or assets -
liabilities). Thus it provides a quite standardized way of demonstrating how “efficient” (and
also “risky”) profits are for equity holders. Note that ROE is highly sensitive to the leverage
(and risk) of the firm: a company can raise its ROE by using debt to buy back shares: total
assets remain the same while debt goes up, reducing the denominator (E) and raising ROE.
So two companies’ ROE can differ because of leverage, or because of the profitability of the
firm as a whole, or both. Or two companies can have similar ROEs but very different
leverage and profitability.

Note that this means there is analytical meaning inside the ROE ratio - it compares profit to
equity, so it actually has a little bit of insight

Putting it together, ROE can help you find evaluate the appropriate EPS multiplier/expected
PE ratio for your company.
3.8K views
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EPS (Earning per share) doesn’t tell you anything. It is simply Net Income divided by
the number of shares outstanding. An argument goes for the growth in EPS which is
relevant and sought after by many investors.

On the other hand, ROE( Net Income/Book Value of Equity) is a measure of profitability.

While EPS is an indicator that the company is profitable, ROE tells you how much net
income a company produces for every dollar of equity investment (without taking into
account debt investment).

Since you, as a shareholder are an equity owner in the company, you want preferrably to see
that equity increase. Essentially, think about it this way: How much much net income the
company produces for every dollar you have invested in the company?

To see this on action, let’s take an example. Let’s assume book equity value of $100 in year
1, and no debt. The company produces $12 net income in that year. Therefore, ROE is
12%. . The equity now is $112 (100+12). The company decides to keep all the profits and
reinvest them. With 12% ROE , next year’s income will be $13,4 (12%×112). Equity is now
$125,4 (112+13,4). So if you invested $1, now you are worth $1,254. And so forth and so on
for the future years. (Equity is also called net worth)

Now let’s go to EPS. Let’s say the company has 100 shares. With $12 net income, the EPS in
year 1 is 12/100=$0,12.

In year two the company keeps the 100 shares and the EPS this time is $13,4/100=$0,134.

It has grown, which is a good sign but as a number on its own, does not say anything. The
same company with 1000 shares has 0,0134 EPS while Net Income and ROE remain the
same.

One thing is important to remember. ROE shows the return, but it’s up to you to decide if
that return is satisfactory. If you can make investments elsewhere with higher return than
the ROE of the company, then it’s not worth investing in the company.

Lastly, ROE is a tool for comparison, while EPS is not. If company A has ROE of 12% and
company B has ROE of 5%, company A is considered more profitable if they both belong to
the same industry.

Meanwhile, let’s say company A produces $12 of net income and has 100 shares (EPS=0,12),
while company B produces $20 of net income but has 1000 shares (EPS=0,02). Is company A
more profitable? Definitely not.

What is Eps(ttm) in stock market?

First of all the meaning of the abbreviations

EPS - Earning Per Share

TTM - Trailing Twelve Months

Earning per share is calculated by dividing total earning of a company by total number of
outstanding equity shares. Earning per share is calculated for a particular time period
ranging from a quarter (three months) to a year (twelve months).

In fundamental analysis, analyst manually calculate EPS for last four quarter or in other
words last twelve months. This time period is term as trailing twelve months or in short TTM,
A TTM may not necessarily represent a fiscal year, but literally the last twelve months.

Hope this helps.

What is a good EPS figure for stock investing

You haven't found any general range to interpret healthy EPS ranges because it does NOT
exist. EPS, as you already know, calculates the Earnings Per Share, meaning it takes the total
profit in a period, and divides it by the total number of outstanding shares. So, it essentially
calculates the profit allocated to each outstanding share of the company.

In calculating the EPS, there are two metrics to cover -

1. Profit
2. Total number of outstanding shares.

Let us break it down for clarity. For example, Company A has a profit of $20 after year 1 and
has 5 outstanding shares. It's EPS is $4 ($20/5). Company B has a profit of $100 during the
same period and has 50 shares outstanding. It's EPS is hence $2. If we judge the two
companies based solely on the EPS, Company A looks more profitable than Company B
(because A has a higher EPS). However, if we look at the total profit in the 1 year period, we
can see that Company B makes more money than Company A, and all else equal, Company
B will thus be more highly valued.

Now let's bring price in the equation. Suppose the price of each share of Company A is $8
and that of Company B is $6. So, if you decide to buy Company A, you are paying $8 for
every $4 the company makes (or you are paying $2 for every dollar the company makes). If,
however, you decide to buy Company B, you are paying $6 for every $2 the company makes
(or you are paying $3 for every dollar it makes). In terms of relative valuation, now,
Company A looks more valuable because you are paying less for the same amount of profit.

For a more realistic example, let's consider Apple (AAPL) and Goldman Sachs (GS). Apple's
EPS in 2014 was $6.45, while Goldman Sach's was $17.07. However, Apple's net profit  was
$39.51 billion, whereas Goldman Sach's total revenue was $34.528 billion. So, Apple made $5
billion more than Goldman even after paying all their expenses despite having a lower EPS.

Hence, as you can see, EPS can be a very misleading (if relied upon exclusively) indicator of
profitability and should not be used to compare between companies.
Generally, companies with positive EPS are more highly valued than companies with
negative EPS, and a novice investor should just stick to companies with long track records of
profit making. But that is not to say that companies with negative EPS should be avoided.
These stocks are extremely attractive to contrarian/special events/distressed securities
investors. But it takes a remarkable amount of expertise and knowledge (don't forget
common sense) to be investing in these companies and being successful.

Again, to answer your question, there is no range for healthy EPS. You should always use
other metrics accompanied by the EPS to value a company.

EPS stands for earning per share. It is calculates as Net Profit/No. of Shares
Outstanding. In simple language, if EPS is 2, it means for 1 share of a company you held
the earning will be 2.

There is no fix figure to determine the good eps. I personally don't pay too much attention
on EPS as it is very easy for company to change its net profit and show wrong numbers to
improve the EPS.

To buy stock of a company, it is important to do more research on other aspects like ROE,
ROCE, Operating Margin, Management Quality, etc. rather than concentrating only on EPS

What-are-the-best-stock-screeners-for-a-group-of-Indian-
stocks
Try Investello Screener, we claim it to be fastest and most detailed screener in the Indian
Stock Market. Here is the snapshot of all the criteria you can use to screen the stocks:

As you can see in the above snaphot, you can use Investello Screener to filter stocks based
on almost all relevant criteria, such as Return on Equity, EPS Growth, Debt Equity Ratio etc.
Here is a detailed description of how you can find great stocks using this screener:

At Investello, we believe that every stock should be analysed from the following 4
perspectives:

Safety:

While investing into the stock market, the safety of your investment always comes first. The
ratios which should be analysed during safety analysis are: Pledged Shares , Debt Equity
Ratio, NPA Ratio (for Banks), Current Ratio etc. Using the above screener, you can easily
narrow down your stock search to the companies which meet a satisfactory safety criteria.
The recommended safety criteria is

 Pledged Shares: Less than 5%

 Debt Equity Ratio: Less than 0.25
 Current Ratio: Greater than 1.5 or 2
 NPA Ratio: Less than 1%
Growth:

In the long term, market always rewards the companies which grow their profits over time.
Past growth does not guarantee the future growth, but looking at it is a good starting point
to find companies which may have a competitive advantage.

The recommended Growth criteria is

 Revenue Growth: Greater than 15%

 FCF Growth: Greater than 10%
 EPS Growth: Greater than 15%
Performance:

Performance and Growth are linked, A consistently performing company will grow its profits.

The recommended Performance Criteria is

 Return on Equity: Greater than 15 or 20%

 FCF by Revenue:Greater than 4%
Valuation:

It is important to ensure that you buy a business at not too expensive a price. We perform
the valuation analysis of stocks based on 4 valuation models.

 PE Valuation Model
 EPS Growth Valuation Model
 DCF Valuation Model
 Graham Valuation Model
You can shortlist the stocks which are trading at below certain level for each valuation
parameter for example by keeping Price by PE Valuation below 1.5, you can find stocks
which are trading within 1.5 times of its fair price according to PE Valuation model.

Using the above criteria simultaneously, you can easily see stocks which meet such criteria.
Such stocks would be good to invest in for a long term. You can also tweak the stocks
according to your own preference.

In order to know further about Stock Analysis, You may also like to read my answer to
Do high-PE stocks fall more than low-PE stocks in large
market declines?
Typically high P/E stocks are growth stocks because to are paying a higher price for their
future potential. Growth stocks always decline more when the overall market declines, so
yes High P/E stocks decline more compared to low P/E stocks. That is one reason why value
investor always look for low P/E stocks. Value investing works in both bull and bear markets.

What is considered an ideal P/E ratio to buy stocks in India?

P/E is a very misleading ratio.

Most people feel that a lesser P/E it is cheap and higher P/E is expensive, this is a highly
incorrect notion.

ITS, Infosys,HUL,Asian Paints, HDFC, HDFC bank etc are high P/E stocks but these stocks
have continuously made money irrespective of P/E due to their ability of creating value and
profits.
A high P/E may be justified due to several reasons

1. Quality of management
2. Growth of company
3. Profits
4. High Return of Equity/High Return on Capital
5. Innovation
and many more

Several companies have been low P/E like many Public sector companies, 10 years back also
they were low P/E and today also they are low P/E but prices are same they have never
made money for investors

CASE STUDY

SJVN was listed at Rs.28 and was P/E of 7 in 2010 and today in 2015 it is Rs.24 at P/E of 6.5.
In last 5 years it has made zero money for investors inspite of it being low P/E

Moral: LOW P/E is not always cheap and good value.

United Breweries is P/E of 100 in 2010 was Rs.400 and is Rs.900 at P/E of 84. In spite of high
P/E it has made money.

Moral: HIGH P/E is not always expensive and bad!