Key Financial Ratios

In one line: Ratios are small numbers that turn a company's big reports into quick, easy health checks.

🎯 What you'll learn

• What a "ratio" is and why it helps you compare companies.
• The most useful ratios: P/E, P/B, ROE, ROCE, margin, debt/equity, EPS growth, dividend yield.
• What a high or low value can hint at.
• Three golden rules so you don't get fooled by one number.

📘 Key concepts

Valuation ratios — "Am I paying a fair price?"

Think of buying mangoes. Price alone means nothing until you know the quality. These ratios compare price to value.

• P/E (Price-to-Earnings) = share price ÷ EPS (Earnings Per Share = yearly profit shared per one share). It shows how many years of profit you pay for today.
• Low P/E can mean cheap — or a weak, troubled company.
• High P/E can mean expensive — or that people expect fast growth.
• P/B (Price-to-Book) = share price ÷ book value per share (book value = company's assets minus its debts, per share). Below 1 can look cheap; useful mostly for banks and asset-heavy firms.

Profitability ratios — "Does the company make good money?"

Like a shopkeeper checking how much profit stays after all costs.

• ROE (Return on Equity) = profit ÷ shareholders' money. Higher is better. Above 15% is often seen as healthy.
• ROCE (Return on Capital Employed) = profit ÷ total capital used (own money + borrowed money). It checks how well ALL money is used. Higher is better.
• Net profit margin = net profit ÷ sales. It shows how much of every ₹100 of sales becomes final profit.

Safety ratios — "Can the company survive bad times?"

Too much loan is risky, like a family with a huge EMI (loan instalment).

• Debt-to-Equity = total debt ÷ shareholders' money. Lower is safer. Below 1 is usually comfortable for most industries.

Growth & income ratios — "Is it improving and paying me?"

A growing shop is better than a shrinking one.

• EPS growth = is profit per share rising year after year? Rising is good.
• Revenue growth = are total sales growing over years? Rising is good.
• Dividend yield = yearly dividend ÷ share price. It shows the cash income you get, like rent on a house.

🔍 Example

A company's share price is ₹200. Its EPS (yearly profit per share) is ₹10.

P/E = Price / EPS
P/E = 200 / 10
P/E = 20

• This means you pay ₹200 today for ₹10 of yearly profit.
• So you pay for 20 years of current earnings.
• Is 20 good or bad? You cannot say alone. Compare it with similar companies in the same industry.

⚠️ Common mistakes

• Comparing across industries. A bank and an IT firm are very different. A low P/E for one is normal; for the other it may be a warning. Always compare same with same.
• Judging on one year only. Look at the trend over 3–5 years. One good year can be luck.
• Trusting a single ratio. A great ROE with huge debt is risky. Read many ratios together.
• Thinking "low P/E = always cheap." Sometimes it is cheap for a good reason — the business is falling.
• Ignoring debt. High profit means little if loans can sink the company.

✅ Key takeaways

• Ratios turn big reports into quick health checks.
• P/E and P/B check price; ROE, ROCE and margin check profit quality.
• Debt-to-equity checks safety; lower is calmer.
• Compare within the same industry, watch the trend, and never judge on one ratio.
• No ratio promises profit — it only improves your understanding.

📝 Quick check

1. Q: A share costs ₹300 and EPS is ₹15. What is the P/E? A: 300 ÷ 15 = 20. You pay for 20 years of current earnings.
2. Q: Which ratio checks safety from too much loan? A: Debt-to-Equity — lower is safer.
3. Q: Why not compare a bank's ratios with an IT company's? A: They are different industries with different normal values, so the comparison misleads you.

📖 New words

• Ratio — a number made by dividing one figure by another to compare things quickly.
• EPS (Earnings Per Share) — yearly profit divided per one share.
• P/E (Price-to-Earnings) — share price divided by EPS.
• P/B (Price-to-Book) — share price divided by book value per share.
• Book value — company's assets minus its debts.
• ROE (Return on Equity) — profit compared to shareholders' money.
• ROCE (Return on Capital Employed) — profit compared to all capital used.
• Net profit margin — profit as a share of total sales.
• Debt-to-Equity — total debt compared to shareholders' money.
• Dividend yield — yearly dividend as a percentage of share price.

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Educational content only — not financial advice. Trading involves the risk of losing money.