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Financial Engines of a Multibagger

Multi-Baggers - these are the stocks which can make a portfolio. Here's how to identify them.

How to spot the Financial Engines behind Multibaggers

CEO of Stockopedia
Ed Croft
CEO of Stockopedia

In this article series, we’re going to learn all about the financial engines behind Multibaggers. This is a deep dive into the key financial drivers, and financial statistics behind the best performing stocks in the market.

If you work through this material, here’s what you’ll learn:

  1. Firstly, you’ll understand a company’s Sales Growth Runway and how a company converts Sales into Profits.

  2. You’ll learn the key concept of Operating Leverage, which is a significant accelerator of profits as sales grow.

  3. You’ll understand Return on Capital Employed, which is the profit reinvestment engine behind great businesses. It leads to compounding capital appreciation.

  4. You’ll learn about Free Cashflow, which is more truthful than profits, and also a form of fuel as cash can be used in many ways, for example for reinvestment into the business.

  5. You’ll learn the term Multiple Expansion, which provides a significant accelerator to returns when a stock is re-rated by the market.

  6. And finally, there’s a bonus section about Share Buybacks, which is a form of financial engineering which many great businesses use to significantly increase earnings per share.

Multibaggers - Financial Engines - key learning outcomes
Learning outcomes for article series on Financial Engines of Multibaggers

At the heart of this learning material is a framework that we call “The Multibagger Equation”. By working consistently through this material, you will gain a deep understanding that will help you identify future multibaggers.

Games Workshop as Case Study

We're going to be Games Workshop, which was one of the top ten multibaggers of the decade period in our research study. Games Workshop is a brilliant little business. It designs and retails tabletop war-gaming products, in an extensive, proprietary fictional universe, and a cult brand of Warhammer. The customers of this business all buy little figurines, which can be painted, and they war with them on tabletop, but the business also has a lot of intellectual property that can is licensed to software and film and other revenue streams.

So it’s a very interesting business. Game’s Workshop’s share price actually increased by fourteen times from 667p to 9,530p over the decade long study period in our research. At one point it was as low as 500p before in 2016 it started to rocket up and almost twenty-bagged. It was actually ranked 100/100 by our StockRanks system at the point of that massive acceleration in share price.

So the market cap actually grew enormously to more than £3bn, the revenue tripled or more, and the operating profit multiplied 7x. So there was significant growth across all key size metrics, and the P/E ratio increased from 13x to 24x. So the key drivers of these changes are what we're going to be looking at here and there through this piece.

Games Workshop - Multibagger Case Study
Games Workshop - a multibagger case study

If you complete this series you’ll have an understanding of how to pick outstanding stock market winners using just a few key financial ratios. You can either read through this article series, or watch the 35 minute video below, which covers the same material.

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