Return on Equity

Raise ₹100 entirely as equity, ₹20 your own, ₹20 from friends, ₹60 from family. If you end the year with ₹120, ROE is 20 percent.

What counts as good varies by industry, so compare within the sector. In a textile peer set averaging 14 to 22 percent, an ROE of 48 percent is outstanding. As a general benchmark, above 20 percent is good in most industries, and it is harder to reach in banks and heavy industries. The floor for picking individual stocks is about 15 percent, because mutual funds return roughly 12 to 13 percent and fixed deposits 6.5 to 7 percent. Below 15 percent, the extra risk of a single stock is not being paid for.

Two things inflate ROE without the business getting better. Debt: borrowed money's returns flow into the numerator while the debt itself sits outside the denominator. Dividends: paying out profit keeps reserves small, so the equity base shrinks and ROE looks impressive. A stock with an 8 to 10 percent dividend yield and a high ROE deserves that second suspicion. HUL pays an ordinary 1 to 1.5 percent yield and still produces an excellent ROE, which is what genuine quality looks like.