Thankfully, there are some inherent qualities that can help us identify shares with odds of success loaded in their favour.
If you stock up your portfolio with shares that meet such high quality standards, there is little reason for you to depend on Amitabh Bachchan and his Kaun Banega Crorepati to make you a multi-millionaire. You can become one sitting at your home.
The key benchmarks of a high-quality stock are as under:
1. The business generates positive free cash flow from operations year on year
2. The total debt-to-equity ratio of the company is very low... say less than 0.4 - 0.5... and preferably declining further
3. The gross margins are showing a consistently increasing trend year after year
4. Earning per share or EPS too is steadily climbing upwards year after year
5. Long term average Return on Equity or RoE is not less than 15%
6. Price-to-sales ratio is around 1 or less
7. Long term average Return on Capital Employed or ROCE is not less than 12%
8. The company has a history of regularly paying dividends
9. Higher the Margin of Safety (= 1/PE*100 - Risk-free returns in FDs/Bonds), the better it is.
And last, but not the least, there are no overnight successes at the stock markets. Making 'Big Money' does not require 'Big Investment' but 'Big Hardwork', 'Big Time' and 'Big Patience'.
[Don't forget to read some of my earlier blogs also on Equity such as '4-P formula to buying GOOD shares', 'PEG Ratio demystified!', 'Warren Buffett’s Margin of Safety' and more...]
