Sign of a Multibagger

Question on Quora: how PE,  ROCE etc. are important to find a good stock?

Is the business (i) a shark in a pond, (ii) a shark in an ocean, (iii) fish in a pond, or (iv) fish in an ocean?

Stage 1: Most important (1) sector analysis (2) market size, these two will determine the size of the opportunity i.e., pond or ocean.

Stage 2: Then is it a shark or fish? To check that, we need to check ROCE, operating profit margin, pricing power.

Stage 3: After fulfilling all this (Stage 1 and Stage 2), we need to check the valuation. If it passes all the test, we will check the historical median PE, sector PE and compare it with this business PE. Similarly, other mentioned ratios will be used then.

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Case 1: A good business (meaning passing Stage 1 and Stage 2) can have moderate or bad valuation (Stage 3) but it still can be considered.

Case 2: Strictly Avoid: a bad business (Stage 1 and Stage 2) but a good valuation (Stage 3)

Case 3: A good business (meaning passing Stage 1 and Stage 2) and good valuation (Stage 3) is superb.