Over and above whatever is already discussed I do like to look at break-up of ROE to test its robustness.
ROE can be broken up into 3 components.
1. Net profit margin
2. Equity turnover
3. Leverage
Net profit margin
I look at net margins first then look at local industry wide net margins, then try to find out global net margins in that industry. (Idea is to test the sustainability of that net margins.)
I also look at historical variations in net margins. If I see a huge difference in last few years compared to a much longer history, I try to find the reasons for same.
I tend to prefer companies with net margins equal or slightly higher than peers. Slightly higher shows some pricing power. I am though wary if the margins are too high compared to peers. In most cases it is not sustainable.
Equity Turnover
I love companies with high/increasing equity turnover. Generally equity turnover is fairly robust and doesn't decrease that often unless there is some external impact on the capital structure. Increasing equity turnover without increase in debts shows that capital requirement for incremantal revenue generation is quite low which is always welcome. High equity turnovers with reasonable net margins can create sustainable high ROEs.
Leverage
I like companies with some debt on their books because debt disciplines a company. However these companies should have ample scope for additional debt or leverage because that provides the flexibility to fund growth and also it can increase the ROEs.
Debt levels i look for is roughly
Debt to equity ratio less than 0.5x or
Debt to EBITDA less than 1.5x
Obviously above mentioned figures can vary depending upon industry and other factors.
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