Return on Equity #4 Multibagger Magic Mantra

It is always good to see companies showing BIG profits!
But, how much profit is good profit?

Company A might do 10 crores of profit
Company B might do 100 crores of profit

This doesn’t always mean Company B is better than Company A

More profits does not always mean a better company!

Instead of looking at it in just absolute terms, what is more important is to look at in relative terms
i.e., for every 100 rupee of shareholder's investment what is the profit that the company is making!

Example:
Let's say Company A and B reports net profit of INR 500 crores.

In absolute terms, both companies are equal in terms of profitability.

But in relative terms,
Company A could be making 30 INR profits for every 100 INR investor’s equity.
Company B could be making just 10 INR profits per 100 INR of equity.

Return on Equity (RoE) of Company A is 30% but Company B is 10%.

Hence, Company A is a better pick than Company B

Return on Equity is a key metric in identifying a multibagger stock; RoE reveals the ability of a company's profitability compared to investor's equity.

Always choose companies with RoE more than 15% consistently

Let's take an example of a good Return on Equity (%): Maruti Suzuki (link)

You can also take a look at few other examples of companies with amazing RoE:

• Avanti Feeds (link)
• TVS Motors (link)
• Eicher Motors (link)

Let's take an example of a bad Return on Equity (%): Tata Motors (link)

You can also take a look at few other examples of companies with terrible RoE:

• Suzlon (link)
• Reliance Communications (link)

This is a five-part series of blog posts, please checkout all 5 posts here (link).