Very valid points made by you. In the class, the example is a bit more elaborate. For example, I include "hafta" as a necessary expense. Now let me try to address your concerns. https://twitter.com/darshanInvestor/status/1326495653418082305

In the original example the street vendor has fixed assets of 10k, inventory of 1k, margin over cost of 100%, and one day's revenue Rs 2k. Depreciation Rs 50. And Profit was Rs 950. Annual profit assuming 300 days of work was Rs 2.85 lacs. and the ROCE is an astonishing 2,590%

You said I did not count the salary of the person. Fair enough. So let's fix it. Let's retire the sole proprietor and replace him with an employee who will run the business for him for a salary. Today, you can hire security guards for INR 10k a month, and they have night duties.

Let's assume the employee hired get paid 10K a month or 120k a year. You can probably get one cheaper but let's go with 120k. That reduces the total profit to 165k for the year for the "equity investor" in this "company."

Compare profit of 165k with capital employed of 11k, and now we get a ROCE of 1,500%. Which is still astonishingly high. It's more than Unilever and Colgate's ROCE.

So now we have a business that earns an ROE (same as ROCE as there is no debt) of 1,500%. Now, some folks who are accustomed to think that all high ROE businesses deserve premium valuation, say that this business should get a multiple of at least 20x.

Multiply 165k with 20, and we get a valuation of Rs 33 friggin lacs. But the capital employed is 11k. So we are now valuing this "fantastic" business for 300 times book value.

THIS was the point I was making. That there are all sorts of "wonderful" businesses with insanely high ROCE and ROE. Still, they do not deserve premium valuation unless there is growth, AND there are significant entry barriers.

The valuation in such cases should be anchored to asset value and not earnings. But still, let's go with earnings for a bit and speculate as to what multiple to give to such a "wonderful" business.

If we give a multiple of 10x, we get a value of 16.5 lacs. Which is 150 times book value. At 5x multiple, we get a value of 75 times book.

My question is: If it's easy for almost anyone to get into this business by investing just 11k, why should a rational person pay 75 times book for it? And if the answer is that he shouldn't, then, it means that this "fantastic" business with 1,500% ROE is worth < 5 times earnings