Level 5: Long-Term Wealth Creation
1. The 3 Financial Statements Every Investor Must Understand
1. The Profit & Loss (P&L) Statement
Shows company revenue, Operating Profit Margin (OPM), Depreciation, and Net Profit after tax (PAT) over quarterly and annual periods. Look for consistent 15%+ Compound Annual Growth in Sales and Profit.
2. The Balance Sheet
A snapshot of what the company owns (Assets) and what it owes (Liabilities). Prioritize companies with low Debt-to-Equity (< 0.5) and rising reserves.
3. The Cash Flow Statement
Accounting profit can be manipulated, but Cash Flow cannot. Ensure that Operating Cash Flow (CFO) is consistently equal to or greater than reported Net Profit.
2. Key Financial Ratios for Picking Multibagger Stocks
- ROCE (Return on Capital Employed) > 18%: Measures how efficiently management generates profits from all capital invested.
- ROE (Return on Equity) > 15%: Measures shareholder return efficiency.
- P/E (Price-to-Earnings Ratio): Compare current P/E against historical 5-year median P/E and sector averages to avoid buying overvalued bubbles.
- Free Cash Flow (FCF): Cash remaining after capital expenditures. Essential for debt reduction, dividend payouts, and organic business reinvestment.
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