Investors are familiar with the term “10-bagger”, which is used to describe an investment that has increased in value by 10x. It’s difficult to find a 10-bagger stock, and it’s a significant accomplishment for investors.

My personal best is a three-bagger, but that doesn’t mean I have stopped dreaming of a 10-bagger one day. In recent years, I have been researching how companies can grow 10x.

One thing I discovered among the 10 baggers I have studied is that they all share the same set of attributes that gives them the potential for huge growth in value and size. Although I realize that much of my research is retrospective, if you are looking for a 10-bagger or a three-to-five-bagger, you will be able to identify all these attributes within a company and get a head start in your search for one before it reaches its tipping point.

Stocks from small to medium-sized companies

Based on the law for large numbers it is more difficult for large companies to grow 10x faster than smaller, younger companies. I don’t think it is possible for Apple to become the first publicly traded company worth US$1 trillion. But, what about the likelihood that it will be worth US$10 billion anytime soon?

A $100 million company, on the other hand, has a better chance of becoming a billionaire than a smaller company. We can be sure that billion-dollar companies will continue to emerge in years to come, given that there are already 2,448 companies in the U.S. that have a combined value of at least a billion dollars.

Apple was once a smaller business — it was listed in 1980 and was valued at US$1.35 million. It has evolved into the tech giant we know today, with the exception of a difficult period in the 1990s.

2. A long runway is essential

The company’s ‘runway’ is the amount of room it has to grow. The runway is a measure of how much growth potential a company has – and the better your chances to become a multibagger. The reality is that runways that are extremely long belong to industries that are being disrupted by new products or business models. We want to be close to the runway’s start so we can hop on and go before the plane takes off.

Amazon, for example, was the pioneer of e-commerce in 1999 when the majority of the world didn’t know what 56.6K meant. (The older readers will understand the connection). E-commerce accounted for 0.5% in total U.S. retail trade sales in 1999. If you thought e-commerce was the future, there were still a lot of runways to travel. E-commerce now represents 10% in total retail sales in the U.S.

Amazon continues to disrupt the retail industry and other industries such as entertainment, logistics, grocery delivery and healthcare.

3. Growth in revenue (and earnings) is crucial

The runway is just one aspect of the equation. If a company wants to take advantage of that runway, it must translate its potential into revenue growth. For many years, companies in high-growth industries typically see double-digit revenue growth.

Investors will often focus on earnings increase because this is the main driver of higher share prices. Earnings growth without revenue growth is a sign that a company has increased profit through cutting costs. There’s a limit on how much you can reduce costs.

If revenue is growing and profit is rising in tandem, then a company is truly growing. High-growth companies may experience weak earnings or even losses due to the fact that they reinvest their profits in future growth. A company must become profitable over the long-term. It will not be sustainable to operate the business if it does not.

Facebook was listed in 2012 with revenues of US$5.1 million. However, the company only made a profit from US$53million. Five years later, Facebook’s annual revenue was US$40.6billion and its net profit was US$15.9billion.

4. Management that is competent and farsighted

The most critical element to a company’s ability to grow 10x in value is its management. Every aspect of a company’s long-term success, including its economic moats and growth drivers, as well as the ability to manage through crises, is down to management. Vision and effort of management are the key to success.

Visionary leadership and good risk management skills are hallmarks of good management. They must be able to trade short-term gains for long-term benefits. These are red flags for management to be aware of. These are management red flags to watch out for.

Howard Schultz was the founder of Starbucks from 1986 to 2000. Starbucks was led by Howard Schultz from 1986 to 2000. He pioneered the idea of the cafe being the’third-place’ between work and home.

However, when he returned to Starbucks as CEO in 2008, the company was suffering from underperformance and overexpansion after pursuing a ‘growth-at-all-costs’ strategy. Schultz turned around the company and refocused Starbucks on its core values, which made it successful.

It’s all about getting a good night sleep as an investor while trusting your hard-earned cash to the people running the company.

The fifth perspective

Of course, these four ratios don’t paint the entire picture; you still need to evaluate a company’s business model, growth drivers, and risk factors among other things. These four ratios are not enough to determine whether you should invest in a stock.

These four ratios work especially well for me in screening for investment ideas. They also help me find great companies to do my research on. These four ratios are easy to use, so get out there and start exploring investment ideas.

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