Saturday afternoon. Friend forwards a screenshot. Three Nifty 200 stocks, three sectors, one number on every row.
All three printed 20 pct ROE last year. "All three are good then, no?" Opened a fourth column on the same spreadsheet. The 20 pct came from three completely different income statements.
The compounder . FMCG sleeve
19.8pct ROE
earned by pricing power
Net Margin15.0 pct
Asset Turnover1.20x
Equity Multiplier1.10x
Brand. Pricing. Almost no debt. Boring quarter after boring quarter.
The volume engine . asset-light retail
20.2pct ROE
earned by turnover
Net Margin4.5 pct
Asset Turnover3.20x
Equity Multiplier1.40x
Thin slice on every sale. Spin the same asset base three times a year.
The leveraged play . capital-intensive industrial
20.0pct ROE
earned by borrowing
Net Margin5.0 pct
Asset Turnover1.00x
Equity Multiplier4.00x
Modest operating return. Financed equity base. The cycle is the risk.
ROE is an identity, not a verdict. Net Margin times Asset Turnover times Equity Multiplier. Three numbers that multiply to the same headline by three different routes. Two companies with the same 20 pct can be a compounder and a hand grenade.