Financial ratios and Screener creation to find a multibagger stock

Summary

The webinar focuses on stock classification by market capitalization into small, mid, and large caps, with definitions varying by region. It emphasizes the importance of fundamental ratios for direct stock investing, cautioning beginners to start with large and mid caps due to higher risk in smaller caps. The discussion covers risk and reward profiles, liquidity, and the availability of company information. It also introduces key financial ratios for stock evaluation, including profitability, liquidity, solvency, efficiency, and valuation ratios, concluding with a practical guide on how to select potential multibagger stocks.

Takeaways

• 📊 Market capitalization is the value of a company, determined by multiplying the number of outstanding shares by the current market price.
• 📉 Large caps have a market cap above ₹20,000 CR, mid caps between ₹5,000-₹20,000 CR, and small caps between ₹1,000-₹5,000 CR. Companies under ₹500 CR are considered nano caps.
• 📈 SEBI categorizes large caps as the top 100 companies by market cap, mid caps from 101 to 250, and small caps from 251 to 500. Beyond 500 are micro caps.
• 🚀 Identifying companies in nano or micro-cap stages that grow into large caps can be a wealth creation strategy, although it comes with high risks and high rewards.
• ⚠️ Small and nano-cap stocks are riskier, less liquid, and have less available information compared to large-cap stocks, which are more stable with predictable returns.
• 📈 Midcaps strike a balance between the high risk of small caps and the stability of large caps, with better returns than large caps, but more volatility.
• 🔍 Small-cap stocks have a 9% chance of becoming large caps, while midcaps have a 24% chance, offering more predictability.
• 🛡️ Micro and small-cap investing is high-risk, high-reward and should be approached cautiously. It's vital to research thoroughly before investing.
• 📑 Key fundamental ratios for stock selection include P/E ratio, PEG ratio, P/B ratio, dividend yield, ROCE, ROE, and debt-to-equity ratio.
• 🧠 Investors should prioritize qualitative factors like management quality, business scalability, and market potential over pure numbers when analyzing stocks.

Q & A

What is market capitalization, and how is it calculated?

Market capitalization (market cap) is the value of a company calculated by multiplying the number of its outstanding shares by the current market price of its stock. It is used to classify companies into large, mid, small, micro, and nano caps.

How does SEBI classify large, mid, and small-cap companies?

According to SEBI, the first 100 companies by market cap are considered large-cap, the next 101 to 250 are mid-cap, and the companies ranked from 251 to 500 are classified as small-cap. Companies beyond 500 are categorized as micro-cap. SEBI does not include a nano-cap category.

What is the potential benefit of investing in nano and micro-cap stocks?

Investing in nano and micro-cap stocks can offer high rewards as these companies have the potential to grow significantly. Identifying a nano-cap company that can grow into a large-cap can be a wealth creator. However, it comes with higher risk.

What are the key risks and rewards of investing in small-cap companies?

Small-cap companies have higher risk but also offer high returns. Liquidity is usually lower, and the availability of company information can be limited. However, small-cap companies can offer exceptional growth opportunities.

How do large-cap stocks compare to small and mid-cap stocks in terms of risk and return?

Large-cap stocks are generally less risky and provide lower but stable returns. They are highly liquid and have better availability of information. In contrast, mid and small-cap stocks are more volatile, offering higher potential returns but with increased risk.

What fundamental ratios should investors consider before investing in a company?

Key fundamental ratios include profitability ratios (like return on capital employed and return on equity), liquidity ratios (like current ratio and quick ratio), solvency ratios (like debt-to-equity ratio), efficiency ratios (like inventory days), and valuation ratios (like P/E ratio and PEG ratio).

Why are qualitative factors important when selecting stocks for investment?

Qualitative factors such as management quality, business model, scalability potential, and market positioning are crucial because they affect the long-term sustainability and success of the company, regardless of current financial ratios.

What is the role of P/E and PEG ratios in stock valuation?

The P/E (Price to Earnings) ratio helps assess whether a stock is overvalued or undervalued by comparing its price to its earnings. The PEG (Price to Earnings to Growth) ratio takes into account the company's growth rate, offering a more comprehensive valuation.

What do rolling returns suggest about the performance of small, mid, and large-cap stocks?

Rolling returns data from April 2012 to July 2024 shows that small and mid-cap stocks tend to be more volatile but offer higher returns compared to large-cap stocks. However, large-cap stocks are less volatile and provide more predictable returns.

How can investors use screening criteria to identify potential multibagger stocks?

Investors can use screening criteria such as low current price, high promoter holding, strong return on equity (ROE), positive profit growth, and favorable debt-to-equity ratio to identify potential multibagger stocks. These stocks may have the potential to convert into large-cap companies over time.