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Return on Equity (ROE) has been refered to as a "Ratio of Ratios."

Net Profit		Sales		Assets
-----------	X	----------	X	---------
Sales		Assets		Equity

Net Profit Margin                            Asset Turnover                             Leverage

Net Profit Margin                            Asset Turnover                        Leverage

So the way a company can increase its ROE is to:

1. Increase its Profit Margin
2. Sell More with the same Assets
3. Leverage itself by taking on Debt

Remember the SSG is a progressive form.

If we are looking at section 2B, we have already verified rising sales, pretax profits, and EPS in section one, the visual analysis, and verified an even or upward trend of the pre-tax profit margin in section 2A. We shouldn't have a situation of a declining sales, eps, or profit margin here.

So if we are seeing an even or upward trend here two good ways to produce it would be to increase the company's profit margin or sell more per unit of assets. One bad way would be to acquire more debt. Adding debt could be used to hide an otherwise declining ROE trend.

ToolKit 5 has a great way to screen for this. By pressing Alt-D (remember Alt-D for Debt) section 2B is changed into section 2C, Debt to Equity. You now have a 10 year history to check for trends in debt.

It's also interesting to look at the analysis of profit in sections one and two of the SSG.

We looked at the rate and consistency of growth for pre-tax profit in section one. In section 2A we looked at the pre-tax profit as a percentage of sales and looked for an even or upward trend to be sure profit was being maintained or increased while sales were being grown. In section 2B we examine how that profit (this time adjusted for taxes) was used as a factor in ROE.