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.

Outlines

00:00

📊 Introduction to Market Capitalization and Stock Classification

The speaker introduces the concept of market capitalization, explaining that it is calculated by multiplying the number of a company's outstanding shares by its current market price. The discussion covers the classification of companies into small, mid, and large caps based on their market cap size, and introduces micro and nano caps. The speaker also emphasizes that the information provided is for educational purposes and not financial advice. Furthermore, they highlight how a stock can grow from nano to large cap, and how investing in smaller companies can lead to high rewards but also increased risks.

05:02

📉 Performance and Volatility of Different Market Caps

The speaker compares the rolling returns of Nifty 50, Nifty midcap, and small-cap indices from April 2012 to July 2024, highlighting that while small and midcaps can provide higher returns, they also come with higher volatility. The speaker advises that while small caps tend to have significant fluctuations (especially during events like COVID-19), midcaps offer a more balanced risk-to-reward ratio. Mutual funds and individual stock performance within these categories are also discussed.

10:03

📈 Historical Data and the Chances of Small Caps Becoming Large Caps

The speaker discusses data from 2010 to 2024, emphasizing that only 9% of small-cap companies eventually grow into large-cap companies. However, when they do, the returns can be significant (around 50%). Midcap companies have a higher conversion rate (24%) to large caps, offering a safer and more predictable investment opportunity with lower but still substantial returns. The speaker advises caution when investing in small and micro caps due to the high risk but acknowledges their potential for exceptional gains.

15:04

📊 Key Ratios for Stock Selection

The speaker provides an overview of important ratios used to evaluate stocks, including profitability, liquidity, solvency, efficiency, and valuation ratios. They argue that qualitative factors like management quality, business potential, and scalability are often more important than strict adherence to ratios. However, understanding and analyzing key financial ratios like the P/E ratio, debt-to-equity ratio, and return on capital employed are crucial for assessing the health and growth potential of companies.

20:07

📋 Efficiency and Liquidity Ratios Explained

The speaker dives into various financial ratios that help measure a company's efficiency and liquidity. Key ratios discussed include the current ratio, quick ratio, and cash ratio for liquidity, as well as debt-to-equity and interest coverage for solvency. These ratios help investors determine how well a company manages its resources and obligations, providing insight into the company’s long-term financial health. Additionally, efficiency ratios such as working capital days and inventory days are touched upon, helping investors evaluate how well a company utilizes its assets.

📉 Creating a Stock Screener: Narrowing Down the Choices

The speaker demonstrates the process of creating a stock screener based on a set of criteria such as price, promoter holding, return on equity (ROE), return on capital employed (ROCE), and profit growth. Starting with a large list of stocks, they narrow it down to a smaller, more manageable selection by applying these filters. The goal is to find stocks that are undervalued but still have strong fundamentals, making them potential candidates for investment. The speaker shares their personal preference for stocks priced under ₹100, aimed at middle-class investors.

💹 Conclusion: Key Takeaways for Stock Selection

The speaker wraps up the session by summarizing the importance of selecting stocks based on one’s risk appetite and conducting thorough fundamental research. They advise caution when investing in small and micro-cap stocks due to their volatility but emphasize that ratio analysis is an effective tool for evaluating a company's health. Additionally, the speaker encourages investors to rely on their own conviction rather than external advice, particularly when the stock market fluctuates, and reminds them to approach high-risk stocks with humility and patience.

Keywords

💡Market Capitalization

Market capitalization (market cap) refers to the total value of a company's outstanding shares in the market. It is calculated by multiplying the current stock price by the total number of shares outstanding. In the video, it is used to classify companies into different categories like small, mid, and large caps, which are essential for understanding investment strategies in various company sizes.

💡Large Cap

Large-cap companies are those with a market capitalization of over 20,000 crore INR (CR), as mentioned in the video. These companies are typically well-established, stable, and involve less risk, making them safer investment options. The video emphasizes that large-cap companies offer lower returns but are less volatile, providing consistent liquidity and access to company information.

💡Mid Cap

Mid-cap companies are classified as having a market capitalization between 5,000 CR and 20,000 CR. They are positioned between large-cap and small-cap stocks. The video discusses mid-cap companies as relatively safer than small-cap stocks but with higher growth potential than large-cap ones, making them a more balanced investment option.

💡Small Cap

Small-cap companies are those with a market capitalization between 1,000 CR and 5,000 CR. In the video, small-cap stocks are highlighted as high-risk, high-reward investments. Due to their lower liquidity and less available company information, they offer greater potential for growth but also carry higher volatility.

💡Risk and Reward

This concept refers to the balance between the potential risk an investor takes on and the possible financial gain. In the video, the speaker emphasizes that as investors move from large-cap to small-cap companies, the risk increases, but so do the potential rewards. The discussion highlights how investors must gauge their risk appetite when choosing different stocks.

💡Rolling Returns

Rolling returns measure how much a stock or investment has returned over a specific period, recalculated at various intervals. In the video, rolling returns for small-cap, mid-cap, and large-cap stocks from 2012 to 2024 are compared, showing that while small-cap stocks can offer higher returns, they also exhibit much greater volatility, especially during market downturns like COVID-19.

💡Fundamental Ratios

Fundamental ratios are financial metrics used to evaluate a company's performance and its stock's attractiveness. The video lists several key ratios, such as the Price-to-Earnings (P/E) ratio, Return on Equity (ROE), and Debt-to-Equity ratio, as crucial tools for analyzing whether a stock is undervalued or overvalued before investing.

💡Price-to-Earnings (P/E) Ratio

The Price-to-Earnings (P/E) ratio is a valuation metric used to determine how much investors are willing to pay for a company's earnings. In the video, it is described as one of the key indicators of whether a stock is overvalued or undervalued. A lower P/E ratio suggests a stock may be undervalued and is a potential buying opportunity.

💡Debt-to-Equity Ratio

This ratio compares a company’s total liabilities to its shareholder equity, indicating how much debt a company uses to finance its assets. The video highlights that a lower Debt-to-Equity ratio is favorable, as it suggests that the company is less reliant on borrowing and is in a more stable financial position.

💡Dividend Yield

Dividend yield refers to the annual dividend payment from a company as a percentage of its stock price. The video suggests that a positive dividend yield is a sign of a healthy company and can be a good indicator for selecting stocks, particularly in the context of mid- and large-cap companies where stable dividends are more common.

Highlights

The webinar discusses the categorization of stocks into small, mid, and large caps and how market capitalization influences stock investments.

Market capitalization is defined as the number of shares outstanding multiplied by the current market price of the stock, determining the company's value.

Stocks are classified into different categories: Large cap (20,000 CR+), Mid cap (5,000 to 20,000 CR), Small cap (1,000 to 5,000 CR), Micro cap (500 to 1,000 CR), and Nano cap (below 500 CR).

The S&P (SEI) classifies stocks by market capitalization, with large caps being the first 100 companies, midcaps between 101-250, and small caps between 251-500.

Stocks often evolve from nano/micro cap to small/mid cap to large cap as companies grow.

Identifying potential nano or micro cap companies that could become large caps is seen as the pinnacle of stock investing.

Risk and reward dynamics: Nano/micro caps carry higher risks but can lead to higher returns, while large caps offer stability with lower risk.

Liquidity is lower in small caps, whereas large caps are highly liquid with easy buying and selling opportunities.

The webinar compares the performance of Nifty 50, Nifty Midcap, and Nifty Small Cap, showing that midcaps have relatively stable returns.

Data analysis revealed that only 9% of small caps will grow into large caps, but they offer exceptionally high returns once they do.

Midcap companies have a higher chance of growing into large caps (24%), but the return is lower (28%) compared to small caps.

Micro and small cap stocks are considered the epitome of high-risk, high-reward investing but require caution.

Fundamental ratios such as P/E ratio, PEG ratio, price-to-book ratio, dividend yield, and enterprise value are essential for evaluating undervalued or overvalued stocks.

Liquidity, solvency, profitability, and efficiency ratios are key in assessing a company's financial health before investing.

A stock's valuation should be based on key factors like promoter holding, return on equity, operating profit margins, sales growth, and profitability ratios to determine if it's a good investment.

Transcripts

mut fuss

okay pral screen is with you

nowos start I think

parp so good evening everybody um we'll

I mean we are going to do this talk

again we did it in the uh Euro Finance

group I mean how we classify this as

small mid and large caps and what are

the fundamental ratios we should know

before we um Venture into any small

middle large cap Stock Investing

directly so this is not uh actually

about uh this um uh what we say mutual

fund investing this is about direct

Stock Investing when we do direct mid

small cap pend up so at the uh foremost

I would like to say the time not say

registered and the information whatever

is provided here is only for the

education purpose only so you should do

your due deance before you um do take

any action after this St boss so what

market capitalization is U uh this is

actually uh the the value of a company

we can say like number of shares

outstanding in the market so the shares

which are there in the market of a

company multiplied by the current market

price of the stock will be considered as

a market cap so this is actually the

value and according to this value we

divide it into the multiple uh groups of

the stock so what's next so like uh this

is one definition which is given

generally in the most of the places

though it is not through the C so this

is large cap is considered as any

company which has a market cap of 20,000

CR and above mid cap is a stock which

has a 5,000 to 20,000 CR market cap

small cap is considered when it has a

1,000 to 5,000 CR market cap micro cap

is 500 to 1,000 CR market cap value and

all other companies below 500 CR market

cap are considered as nanoc cap

companies or they can say this is 50

billion now now this is a a SEI

definition in SEI they considered first

100 companies by market cap whatever is

their value so it can be even whatever

is the value if first 100 companies of

large caps next 1001 to 250 are midcap

then 251 to 500 companies are small cap

and Beyond on this 500 companies all are

micro cap SEI does not consider a nanoc

cap category here so nanoc cap does not

actually exist in the savs criteria G

sir now uh the Journey of a stock is is

like we are the urologist so we know

this very well like like it is the

companies they start from the Nano all

are together they're all small companies

together then they move forward become

micro cap further move forward become

small cap then they take their Journey

forward to midcap and finally they reach

to The Pinacle level of large cap so

idea is that if you can identify a

company which is a nanoc cab today can

become a large cab tomorrow that will be

the wealth Creator so anybody who has

that n that is why they say The Pinacle

of investing is investing in the Nano

and micro cap investing most of the

biggies they they invest in the micro

nanocap but we as a as a beginner we

should test the waters with the large

and midcap and gradually we should move

towards the Nan man micro cap stocks G

sir so these are some features of

different caps of stock so when we move

towards the small to the nanoc cap the

risk increases risk becomes very high

but at the same time returns are also

very high so it's a high risk High

reward in small cap group liquidity is

very low in the small cap group but and

company information is also very poor in

this area but in contrary to small cap

if you go with the large cap so all are

exactly opposite like Risk probability

so risk is low probability have

exceptionally High returns like you

can't expect Larson and to Bro L to

become three times in two years

liquidity is very good so whenever you

want to sell you can sell whenever you

want to buy you can buy this they do

they hardly go into the circuits and

company information in in uh in uh

social media in every media every

platform it is very good and the midcaps

they stay somewhere between these two

yes

sir so when we look at these rolling

returns yesterday only I think we were

talking in the group about

the whether we should go with the small

cap micro cap or we should go with the

midcap and nanoc cap so if you look this

this chart carefully y this is April

2012 to December uh sorry to July 2024

rolling returns now if we look at this

chart nifty 50 has definitely performed

poorly than the rest two that is Nifty

midcap and small cap but if you look at

the volatility it is other two are very

volatile while Nifty moves little less

look at this small cap this green graph

when when covid came it it went so down

otherwise midcap is relatively better

placed this this on this pink line it is

aely better place so we can um we can

say that's a much more safer and

predictable zone is midcap returns are

midcap small cap they keep on changing

overing I mean sometimes midcap will be

above sometimes small cap will be above

and overall I think they they will give

you a more or less same kind of return

if you look at the mutual fund wise but

otherwise

as for stocks also they are like that

only uh next

sir now this is a recently published

this data in a recent magazine wealth

Insight so they analyze all these

companies from March 10 to March 24 and

they realize that chances of a small cap

company becoming a large cap company are

less but when it becomes like 9% only 9%

small cap companies will only become

large cap but when they become large

they will give a exceptionally High

returns like 50% return but but you need

to find them one in 100 will reach to

this level while if midcap conversion

from a small cap is relatively high like

12.7% companies they become mid cap

companies and return are relatively less

35 but if you look at the midcap

companies say 24% that is one in four

becomes a large cap company and when it

becomes large cap company it gives you

28% return so though the returns are

less like 50% to 28% half but chances

one in 4 to one in 100 so that is how it

is more predictable midcap to the small

cap yes

sir so as they say micro and small cap

investing is obviously epitomizes the

sense of Stock Investing the epome of

investing but not everybody can do that

and it's a very high risk very high

reward uh investing so you must test

these Waters with caution

sir now these are some fundamental

ratios for stock selections now what I

feel is to me the qualif qualitative

factors are more important like I will

go with the management quality business

mode scalability potential additional

Market more rather than going with the

fixed ratios because uh if the

management is not good so they they'll

always cheat you somewhere now these are

certain ratio analysis which are the

profitability ratios liquidity ratios

solvency ratio efficiency ratio and

valuation ratios the five are very

important ratios which we must know

before we enter into any company and we

must check

them uh next up now valuation ratios are

ratios which we tell us how valuable a

stock is it is undervalued stock or it

is a overvalued stock so they say if it

overv valued stock you should not buy it

you should wait it for the correction

and it is undervalued stock you must

accumulated the factors which tell us

whether it is undervalued or overvalued

are p ratio that is price to earning

ratio price to earning to growth ratio

that is PEG ratio Price to Book ratio

dividend yield and Enterprise values

versus Abid so if these are there to and

we we need to learn a lot about all

these ratios independently so we will

have another class on these ratios

sometimes then profitability ratios are

the ratios which tell us whether compy

is ability to utilize resources to

generate profit so how much money they

need to make money over it so that

percentage is important so if somebody

is making uh High returns so that is a

return on Capital employed return on um

um return on Roe that is return on

sorry uh both cut TR this I think return

on asset is not there so return on

yeah

it's then these are liquidity ratios

which tell us about company's ability to

repay short-term liabilities whether it

can uh repay the liability current ratio

quick ratio there is another ratio is

Cash ratio so cash ratio is very

stringent current ratio is commonly used

cook ratio also then there is solvency

ratio you tell us about company's

ability to repay long-term liability

this is long-term that is shortterm so

debt to equity ratio interest coverage

ratio these are there and efficiency

ratios which tell us us about how

efficient companies in in generating uh

profits that is working capital days

inventory days and receivable days these

are some efficiency ratios there are

certain growth ratios which tell us

about the growth rate of the company

that Revenue growth rate sales growth

rates and EPS growth rate

sir so this is a one table which uh I

mean which we can follow like uh

whenever we buy a stock like promoter

holding should be more than 50%

preferably more than 50 good if it is

more than 70% p ratio should be either

less than 20 or it should be at least

less than the industry p ratio PEG ratio

should be less than one debt equity

ratio should be less than3 or if it is

debt free that is much more better

dividend yield should be positive and

return on Capital employed row should be

more than 15 ROE should be more than 15

operating profit margin OPM should be

more than 50 sales growth should be 15

to 20% preferably and profit growth

would be more than 15 to 20% so if if a

company fits into all these criteria

then we can find say it's a good company

and we can definitely buy it if it is a

undervalued and it's a perfect to buy

and accumulate this stock

so so in conclusion I would say choose

among different caps as per your risk

appetite because it is about the risk

and reward do a tho fundamental research

before you take a entry and make your

own conviction rather than taking

anybody else's conviction so that you

can you can add um whenever you the

stock Falls approach uh small and micro

nanocap stocks with humility because

they can test your patients as well test

your death I mean the dep pocket also

they can move a lot at times they can

move 50% 60% down don't be fearful but

we always cautious uh ratio analysis

helps us in evaluating the company's

Health as well as their performance and

it plays an important role in comparison

of companies with within a

sector thank you was I think that's all

from my

side thank you Dr prpal for a lovely

talk this was a very good talk he had

given during the Euro Finance 2 now if

anybody has taken a kind of a screenshot

of the second slide what he had second

last slide he had shown we that is the

second part of this webinar let me open

up my

[Music]

screen now what do uh let me I share the

screen uh you all can see my screen

uh

screen okay now we will use whatever Dr

pral has said because we the second part

of this webinar was finding a

multibagger which has a potential to

convert into a into a large cap company

that is one out of 100 which is going to

convert us so we are not going to keep

we'll try to uh follow all whatever he

has shown in his second last slide is so

we will go to the screens we will start

creating a new

screener so our first is the current

price should be less than

100 so we are not looking at anything

which is more than 100 we can go and

look at it but I'm personally saying

because I'm middle class upper middle

class lower middle middle class May so

we should needed some pocket friendly

stock so if we run this query we get

somewhere around 2258 stocks now I will

ask you all to only say me what was it B

promoter

holding more than 50% more than so we

will keep

60% now we have narrowed down to from

2200 we have come down down to

843 still too high number for

me PR return on Equity Dr more than 15

more than 15 we will increase to

25 now we are close to 64 from 843 we

are getting into 64 stocks

return on

Capital more than 15 I'm

25 still 39

stocks

next profit

growth more than 15 more than 20

more than

20

25 next next condition

please anybody please

sir Deb to equity ratio3

[Music]

next

sir sales

growth op opium more than 15

which St

stops anybody

ratio yes

sir less than

one less than one let's run

it stocks

next

S

Sales dividend

Yi dividend Yi

greater 5% that is too much

yeah dividend positive

only dividend Yi greater than

zero easy

planner kind of a operator stock

mger

stock mother and

sui mother wiring wiring mother wiring

it was wiring it was wiring

[Music]

sir this is how you can pick up a

stock market

capitalization greater than 500 CR or

1,000 CR

[Music]

operating profit

margin operative

prof1

rupees which is reasonably High stock

we are not

sure from 41 to 34 anywhere around but

30 rupees it's a good stock to hold on

uh couple of members did make a loss I'm

also in loss but I added

below so a stock is worth watching and

it's an affordable stock being very

honest on it please please please before

you actually dive into any

stock close to

52 rooc is

43.4% Roe 31 %

15% cash flow is

154 crores

approximately profit after

taxation previous year is also

54.6 or

43.4 5 years Roe return on Equity is

around 40 which is reasonably good

place

31.9 do read about a stock before you

actually take a

trades drawback promoters offload

approximately 10% holding they have gone

to the institutional players they can be

a positive news but Market negatively

respond we don't know what way it is

going to go in future future also so if

you go down and see perer comparison the

operating profit

margin watch list and whenever it gives

it entry somewhere on what 30 rupees do

not leave this opportunity to buy the

stock

is we are done with the webinar part is

and I'm going to stop the recording I'm

going to stop recording