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Return on equity is one number, but it is built from three. Until you split it apart, a high ROE and a fragile ROE look exactly the same.
Profitability ratios answer the question: how efficiently is the company converting inputs into profit?
Liquidity ratios answer: can this company pay its bills in the short run?
Solvency ratios answer: can this company survive the long run? Is the debt manageable relative to earnings power and asset base?
Efficiency ratios measure how productively a company uses its assets to generate revenue.
Market ratios combine financial statement data with market prices to express what investors are paying for each unit of earnings, book value, or cash flow.
ROE is the most important single metric for an equity investor, it tells you how much the company earned on shareholders' capital.
The original fundamental analysis course: approaches, qualitative factors, the three statements, ratio categories, sector checks, red flags, and valuation models.
Market capitalisation is the total market value of all of a company's shares. It is the money you would need to buy 100 percent of the company at today's share price.
Enterprise value is the true cost of acquiring the whole business. It adds the debt you would inherit to the market cap and subtracts the cash you would gain.
Earnings per share is the slice of net profit that belongs to each share. It is the building block for the PE and PEG ratios.
The PE ratio tells you how many years of current earnings you are paying for a share. It is the most used, and most misused, valuation ratio.
The price to book ratio compares the share price with the book value per share, the accounting net worth that backs each share.
The PEG ratio adjusts the PE ratio for profit growth. It asks whether the multiple you are paying is justified by how fast earnings are growing.
The price to cash flow ratio compares the share price with operating cash flow per share. It uses money actually received instead of booked profit.
The price to sales ratio compares a company's market cap with its annual revenue. It is the multiple you fall back on when there are no earnings to divide by.
EV to EBITDA compares the total cost of acquiring a business, debt included, with its operating earnings before interest, tax, depreciation, and amortisation.
EV to sales compares the total cost of acquiring a business with its annual revenue. It is the price to sales ratio corrected for debt and cash.
Earnings yield is the PE ratio turned upside down: the profit a company earns per year as a percentage of its share price. It lets you compare a stock directly with a bond or a fixed deposit.
Free cash flow yield is the surplus cash a business generates in a year as a percentage of its market cap. It is the earnings yield computed on cash that actually exists.
Dividend yield is the cash dividend paid per share as a percentage of the current share price. It is the only dividend figure worth looking at; the dividend percentage quoted on face value is meaningless.
Net profit margin is the profit left after every expense and tax, expressed as a percentage of sales. It is also called PAT margin, for profit after tax.
Return on equity measures the profit a company earns on its shareholders' money. Equity is money raised without paying interest: share capital plus retained reserves.
Return on capital employed measures operating profit earned on all the money running the business, equity and debt together.
Gross margin is what remains of each rupee of sales after paying for the raw materials and direct costs of making the product, before any operating expense.
Operating margin is the profit from running the business, before interest and tax, as a percentage of sales. It shows how efficiently the company converts revenue into profit from operations alone.
EBITDA margin is operating profit before depreciation and amortisation as a percentage of sales. It approximates the cash profit from operations before any capital spending.
Return on assets measures net profit against everything the company owns, regardless of whether it was funded by shareholders or lenders. It is ROE with the leverage removed.
The dividend payout ratio is the share of net profit a company distributes as dividends. What is not paid out is retained in reserves and grows the equity base.
The debt to equity ratio compares borrowed money with shareholders' money. It shows how much of the business is financed by lenders who must be paid whether or not there is profit.
Interest coverage shows how many times over a company can pay its interest bill out of operating profit.
The quick ratio checks whether a company holds enough cash and liquid investments to pay the obligations coming due in the next few months, even in an emergency.
The current ratio compares everything a company expects to turn into cash within a year with everything it must pay within a year. It is the broadest measure of short-term solvency.
Net debt to EBITDA tells you how many years of operating cash profit it would take to repay all borrowings, net of cash on hand. It is the leverage measure lenders and rating agencies actually use.
Asset turnover measures how much sales a company generates from each rupee of assets: plant, machinery, computers, land.
The cash conversion cycle is the number of days between paying for raw material and receiving cash from the final sale.
DuPont analysis breaks return on equity into three drivers, margin, asset turnover, and leverage, so you can see whether a high ROE was earned or borrowed.
Working capital days are the three components of the cash conversion cycle: how long stock sits before it is sold, how long customers take to pay, and how long the company takes to pay its suppliers.
Fixed asset turnover measures how much sales a company generates from its plant, machinery, and buildings alone, leaving out cash, inventory, and receivables.
The CFO to PAT ratio compares five years of cash flow from operations with five years of reported net profit. It is the simplest anti-fraud check in fundamental analysis.
Free cash flow is operating cash flow minus the cash the business is forced to reinvest to keep running and growing. It is the money that is genuinely surplus.
Cash flow per share is operating cash flow divided by the number of shares. Set next to EPS, it shows how much of each share's reported profit actually arrived as cash.
The CASA ratio is the share of a bank's total deposits that sits in current and savings accounts, the cheapest money a bank can raise.
Cost of funds is the blended average interest a bank pays across every kind of deposit and borrowing it uses to fund its loans.
Net NPA is the percentage of a bank's loans, after provisions, that are not coming back. It measures the one skill a bank cannot do without: judging who will repay.
Advances growth is the year-on-year increase in the loans a bank has disbursed. Since banks earn interest on loans, faster loan growth means faster earnings growth.
The capital adequacy ratio measures how much capital a bank holds against its risk-weighted loans, which decides how much further lending it can support.
Net interest margin is the interest a bank earns minus the interest it pays, as a percentage of the funds it holds, after allowing for money it could not lend out.
Return on assets measures a bank's net profit against its total assets, which for a bank means the loans it has given out.
Common-size analysis restates every line of a bank's profit and loss as a percentage of interest income, and every funding source as a share of the balance sheet, so banks of any size can be compared line by line.
Gross NPA is the share of a bank's total loans on which interest or principal has been overdue for more than 90 days, before any provisions are deducted.
The provision coverage ratio is the share of a bank's gross non-performing loans that has already been written off against profit through provisions.
The cost to income ratio measures a bank's operating expenses, branches, staff, technology, against its total income from interest and fees. It is the efficiency ratio for lenders, where asset turnover does not apply.
The credit to deposit ratio shows what share of the deposits a bank has collected it has lent out as loans. It measures how fully the bank is using its cheapest source of funds.
Sales growth is the percentage increase in a company's revenue over a period. Compared across one, three, and five years it shows whether the business is accelerating, steady, or shrinking.
Profit growth is the percentage increase in net profit over a period. It is the denominator of the PEG ratio and the figure that decides whether a high PE is deserved.
Promoter holding is the percentage of a company's shares owned by its founders or controlling group. Read with institutional holdings, its trend is an early warning of trouble long before it shows in the accounts.
Pull numbers from financial statements and compute the ratios analysts use every day, you do the math, we check it.
Use a structured framework to compare two companies in the same sector. Predict the winner, then see the full profile.
The portion of a company's profit allocated to each outstanding share of common stock. A key indicator of company profitability on a per-share basis.
A measure of how efficiently a company uses shareholders' equity to generate profits. Shows percentage return on shareholder investment.
Indicates how efficiently a company uses its assets to generate profit. Shows how much profit is generated for every rupee of assets.
A measure of how efficiently a company uses its total capital (equity + debt) to generate profits. Better for comparing capital-intensive businesses.
The percentage of revenue that remains as profit after all expenses, taxes, and costs are deducted.
Operating profitability before interest, taxes, depreciation, and amortization as a percentage of revenue.
The ratio of a company's current stock price to its earnings per share. Indicates how much investors are willing to pay for each rupee of earnings.
Compares a stock's market value to its book value. Shows how much investors are paying for the net assets of a company.
The P/E ratio divided by expected earnings growth rate. Adjusts valuation for growth expectations.
The annual dividend payment divided by the stock's current price, expressed as a percentage. Shows income return on investment.
The total value of a company including both equity and debt, minus cash. Represents what it would cost to acquire the entire business.
Enterprise Value divided by EBITDA. A valuation metric that compares total company value to operating earnings.
Measures a company's ability to pay short-term obligations. Compares current assets to current liabilities.
A stricter liquidity measure that excludes inventory from current assets. Shows ability to meet obligations without selling inventory.
A measure of a company's financial leverage, showing the proportion of debt used to finance assets relative to shareholders' equity.
Measures how easily a company can pay interest on its outstanding debt. Higher is better. Ratio below 1.5 is concerning. Companies with low coverage may struggle during downturns. Look for consistent coverage above 3.
Measures how efficiently a company uses its assets to generate revenue. Higher ratio indicates better efficiency.
A multiple comparing firm value to revenue. Used when earnings are negative or temporarily depressed, since revenue is harder to manipulate than profit.
Free cash flow per share divided by the share price, or firm-level free cash flow divided by market cap. It shows the cash return the business generates on its current price.
The inverse of the P/E ratio: earnings per share divided by price. It expresses valuation as a percentage return, making stocks directly comparable with bond yields.
The share of net profit paid out as dividends. The remainder, the retention ratio, is reinvested in the business.
The value of all cash flows beyond the explicit forecast period in a DCF, usually estimated with the Gordon growth formula. It typically accounts for the majority of a DCF's total value.
The gap between a stock's estimated intrinsic value and its market price. Buying below intrinsic value creates a cushion against errors in the estimate.
Shareholders' equity divided by the number of shares outstanding. It is the accounting net worth attributable to each share.
After-tax operating profit divided by the total capital invested in the business, both debt and equity. It measures how well the company converts all its capital into operating profit.
Operating profit (EBIT) with tax removed, before any financing effects. It is the profit the business generates for all capital providers.
The sensitivity of operating profit to changes in revenue, driven by the share of fixed costs. High fixed costs mean small revenue changes produce large profit swings.
Gross profit as a percentage of revenue: what remains after direct production costs, before operating expenses.
Operating profit (EBIT) as a percentage of revenue. It captures the profitability of the core business after all operating costs but before interest and tax.
Related topics: Valuation, DCF, Relative Valuation, Cost of Capital, Financial Statements, Cash Flow, Earnings Quality, Red Flags
