Step-by-step guide to identify multibagger stocks — 5 key metrics to watch as new investors

New investors entering the Indian stock market will likely raise questions regarding complicated market terms like multibagger stocks, debt-to-equity ratio, and cash flow, among other things.

A multibagger stock is a share which shows strong potential for a rise in the future in the near-term or long-term with the help of sectoral tailwinds or the company’s robust financial health.

According to stock market experts, new investors can identify multibagger stocks by looking at a firm’s quantitative, qualitative, and consistency aspects. 

3 Key aspects to look for in a business

Narendra Solanki, the head of fundamental research at Anand Rathi Shares and Stock Brokers, said that a company’s “Quantitative” aspects can be identified by its ability to make strong sales, maintain growth and profitability, and focus on its long-term expansion vision.

The “quality” of a business can be identified by the firm’s superior capital allocation moves, strong returns to investors, and a healthy balance sheet with minimal debt obligations.

On the “consistency” aspect, Solanki focused on a company’s ability to achieve growth targets over multiple business cycles (over the years), which will identify a company’s performance over a longer time period.

“When all these factors—growth, quality, and consistency—align and progressively improve over time, they create a strong foundation for a company’s valuation multiples to expand (rerate higher). As investor confidence increases and the market recognises the company’s superior fundamentals, its stock price tends to rise sharply, generating substantial returns for long-term investors,” said Solanki. 

Why should you invest in a multibagger stock?

A multibagger stock often attracts stock market investors with the promise of high returns backed by internal and external factors such as company health, sectoral performance, market trends, government policies, institutional investors or high-net-worth (HNI) individuals’ interest, etc.

“Finding a multibagger requires a balanced approach, considering financial strength, valuation, industry trends, and macroeconomic factors,” said Mayank Mundhra, FRM – VP Risk & Head of Research at Abans Group.

However, Mundhra highlighted how no method guarantees success in identifying a multibagger. Investing in fundamentally strong businesses with high growth potential is always a safe play for investors.

“Investing in fundamentally strong businesses with high growth potential and favourable market conditions can significantly increase the probability of identifying the next big wealth creator,” said the stock market expert. 

5 key metrics to identify multibagger stocks

1. Earnings growth: Consistent earnings growth is the first key indicator for a potential multibagger stock. Companies with a compounded annual earnings growth rate (CAGR) of 15-20 per cent in the last 3-5 years and scalable business models serve as multi-baggers with increasing market demand. 

“Revenue growth should also be steady. If sales are rising but profits remain stagnant, it could indicate high operational costs or inefficiencies. This too should be looked at with respect to depreciation increase, as new capacities come online,” said Mundhra. 

2. Low debt-to-equity ratio: The debt-to-equity (D/E) ratio is a key metric that compares the company’s current debt with its equity to analyse risk and the firm’s financial health. Businesses with low (D/E) ratios are financially stronger and face low risks during an industry downturn. 

“A return on capital employed (ROCE) and return on equity (ROE) above 15 per cent indicate efficient capital allocation and strong profitability,” said the expert. 

3. Healthy cash flow: Free cash flow is another key factor through which any firm can re-invest money to expand the business, take debt reduction measures, or grant dividends to shareholders to attract more investment. 

4. Valuation game: Understanding the valuation game is essential for any new investor as market participants tend to overpay for high-growth stocks which can turn out in lesser or “disappointing returns”. 

If investors want to understand the valuation game, the key metric is the price-to-earnings (P/E) ratio, which they use to compare their performance with those of their industry peers. This metric also serves as an indicator to identify whether a stock is expensive or cheap at the current market price (CMP). 

“Values below 1 suggest that the stock is undervalued relative to its growth potential,” said Mundhra. 

Other advanced metrics are EBITDA (EV/EBITDA) and price-to-book (P/B) ratio, which help investors compare a company’s valuation with its assets and earnings over a specific period. 

However, Manish Jain, the Director of Institutional Business (Equity and FI) at Mirae Asset Capital Markets, called out an investor strategy called a “Sympathy Play” and explained how new investors should avoid it.

“A Sympathy Play is a stock in the same industry group that is bought in the hope that the lustre of the real leader will rub off on it. But the profits of such companies usually pale in comparison. The stocks will eventually try to move up ‘in sympathy’ with the leader, but they never do as well,” said the stock market expert. 

Indian Stock Market — Expert View

The Indian stock market remained resilient amid headwinds from global tensions over the potential major trade war between the United States and other major economies. The Nifty 50 index closed 0.03 per cent lower at 22,547.55 points, compared to 22,553.35 points at the previous market close.

The BSE Sensex index closed 0.20 per cent higher at 74,602.12 points, compared to 74,454.41 points in the previous market session.

Analysing the Indian stock market’s performance, Mayank Mundhra said that foreign institutional Investor (FII) outflows exceeding ₹95,000 crore since early 2025 have pressured the domestic stock markets. However, domestic institutional buying and strong quarterly earnings in certain sectors have supported the markets.

“Investors should remain cautious, focusing on quality stocks and key sectors, as near-term fluctuations persist amid global and macroeconomic headwinds,” Mundhra pointed out.

Disclaimer: The views and recommendations above are those of individual analysts, experts and broking companies, not of Mint. We advise investors to check with certified experts before making any investment decision.