How low Equity Stocks can make you Rich in Stock Market?



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Low equity stocks have actually a very low number of shares in the stock market. For example, if during public offerings the company issued 30 lac (30,00,000) shares of Rs.10 each (face value is 10) then equity is 30 lac * 10 = 3cr . So here 3cr of low equity corresponds to only 30 lac shares considering the face value of the share is Rs.10. Now, suppose the promoter holding is 50% which means out of 30 lac shares, 15 lac shares are held by the company itself, so in the open market, there are only remaining 15 lac shares for the retailers. Promoters usually don't sell their own shares, unless they are very much sure that their business will no longer be able to sustain. Since there are not many floating shares in the open market for low equity stocks, the price of such stocks rise very quickly, as there are hardly any sellers and so the buyers are forced to buy at higher prices.

The only thing you need to take care is that the fundamentals of such low equity stock companies should be good because if the fundamentals are not good than sellers would hardly find buyers and in that case, the stock price may fall steeply. I remember I bought the stocks of a company called coral laboratories (in pharma sector) at a price of Rs.176 whose equity was only 3.57cr.

As on 31st March 2013, the net worth (reserves) of the company was 43.54cr and debt in their books was zero. So the company was worth 43.54cr as on 31st March 2013. As on 31st March 2014, the yearly profit after tax (PAT) of the company was 7.87cr. It means the company made a profit of 7.87cr in one year (from 1 April 2013 to 31st March 2014) by using the money of amount 47.11cr (reserves + equity). So the return on equity came out to be 16.70% (7.87/47.11*100) which was tremendous. The yearly EPS (earnings per share) was Rs.23 (7.87cr profit divided by total number of shares) which was awesome.

Moreover, I saw that on their balance sheet that their "debt to cash flow ratio from business operations" was only 0.19 which means hardly any payment was stuck with their clients and mostly they used to receive payment on time. So this was a high margin business for me with high return on equity and the company was not at risk of high debt, and none of the shares of the company were pledged to any financial institutions. I thought this was a wonderful opportunity and I bought the shares of this company and now (as on 15 July 2017) the price of this stock is Rs.1058 and I am still holding this stock.

I only mean to say here, that the stock price of low equity stocks rise very quickly, and to a great extent if the fundamental of the company is strong. But before buying low equity shares just make sure to check things like yearly EPS, return on equity or ROCE(must be great than 12%), debt to equity (should be lower than 0.50), debt to cash flow (should be lower than 0.50) and also check PE (price to earnings). If PE is high that means the stock is already overpriced and you don't need to take a risk in buying such stocks. All these data for any company you can check on sites like sharemarkethow.com. Just make use of the search box on the top to know data of any Indian stock listed company. Make use of bigger screen like a laptop or desktop computer as the search box still doesn't work on mobile phones.

Generally, equity less than 10cr is considered as low equity but lower the better. I can also tell you a way to find all stocks in Indian stock market with low equity. Just make use of this stock scanner at sharemarkethow.com. Select "Find all companies with low equity stocks" and then click on "click to find". This will give a huge list of stocks with low equity as per your query and this is what you needed. Make use of bigger screen like a laptop or desktop computer as the stock scanner page is still not mobile friendly.

Also, check the data of another company called DHP India whose equity is just 3cr and yearly eps is around 47. Even if it trades 12 times of its eps than also its price should be Rs.564 but as I am writing (on 22 May 2018) its price is only Rs.492 which clearly shows the stock is highly undervalued. To know if a stock is undervalued or overvalued you should check how many times it is trading of its eps. Then check other companies in the similar industry and compare the PE multiple and that will give an idea whether the stock is undervalued or overvalued. PE multiple is nothing but the number of times a stock is trading of its EPS.

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Written by: Rajesh Bihani ( Find me on Google+ )

Disclaimer: The suggestions in the article(wherever applicable) are for informational purposes only. They are not intended as medical or any other type of advice