Ratio Analysis
Every financial ratio an analyst reaches for, with its definition, its formula on one clearly labelled line, what a good number looks like, and a worked example, drawn from Indian companies wherever the source notes provide the figures.
Ratio analysis turns three financial statements into a handful of numbers you can compare across years and across companies. No single ratio settles anything. Each one answers a narrow question, and the skill is knowing which question it answers, which industries it works for, and which distortions make it lie. That is what each page in this section covers, in the same order every time: definition, formula, how to read it, an Indian example, and the caution.
Size and Price Metrics
What the market is charging for the company, and what you actually get for that price.
Market Capitalisation(Market Cap)
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.
Market Cap = Share Price × Number of Shares
Benchmark: A size gauge, not a valuation verdict
Definition, formula, exampleEnterprise Value(EV)
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.
EV = Market Cap + Total Debt − Cash and Cash Equivalents
Benchmark: Low, zero, or negative EV is a prompt to investigate, not a buy signal
Definition, formula, exampleEarnings Per Share(EPS)
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.
EPS = Net Profit ÷ Number of Shares
Benchmark: Track the growth over 1, 3, and 5 years rather than the level
Definition, formula, examplePE Ratio(Price to Earnings Ratio)
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.
PE = Share Price ÷ EPS
Benchmark: Judge against the company's own history and its profit growth, not a fixed number
Definition, formula, examplePrice to Book Ratio(P/B Ratio)
The price to book ratio compares the share price with the book value per share, the accounting net worth that backs each share.
Book Value per Share = (Share Capital + Reserves) ÷ Number of Shares
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Benchmark: Useful for banks and asset-heavy industries, meaningless for IT and brand-led businesses
Definition, formula, examplePEG Ratio(Price/Earnings to Growth Ratio)
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.
PEG = PE ÷ Profit Growth Rate (%)
Benchmark: Around or below 1 is fair, above 1 signals expensive
Definition, formula, examplePrice to Cash Flow Ratio(P/CF Ratio)
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.
P/CF = Share Price ÷ Operating Cash Flow per Share
Benchmark: Judge it against peers and against what you get for the multiple
Definition, formula, examplePrice to Sales Ratio(P/S Ratio)
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.
P/S = Market Cap ÷ Annual Sales
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Benchmark: Only meaningful against peers with similar margins; read it with net margin
Definition, formula, exampleEV to EBITDA(Enterprise Value to EBITDA)
EV to EBITDA compares the total cost of acquiring a business, debt included, with its operating earnings before interest, tax, depreciation, and amortisation.
EV/EBITDA = Enterprise Value ÷ EBITDA
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Benchmark: Compare within the sector; capital-light businesses command higher multiples
Definition, formula, exampleEV to Sales(Enterprise Value to Sales)
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.
EV/Sales = Enterprise Value ÷ Annual Sales
Benchmark: A peer-comparison multiple for loss-making or early-stage companies
Definition, formula, exampleEarnings Yield
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.
Earnings Yield (%) = EPS ÷ Share Price × 100
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Benchmark: Compare with the fixed deposit rate and the 10-year government bond yield
Definition, formula, exampleFree Cash Flow Yield(FCF Yield)
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.
FCF Yield (%) = Free Cash Flow ÷ Market Cap × 100
Benchmark: Higher is better; a positive earnings yield with a negative FCF yield is a warning
Definition, formula, exampleDividend Yield
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.
Dividend Yield (%) = Dividend per Share ÷ Current Market Price × 100
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Benchmark: Above 5% usually signals limited growth; a very high yield with rising debt is a red flag
Definition, formula, exampleProfitability and Return Ratios
How much profit the business keeps from each rupee of sales, and how hard it makes its capital work.
Net Profit Margin(PAT Margin)
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.
Net Margin (%) = Profit After Tax ÷ Sales × 100
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Benchmark: Compare within the industry; a high margin is not the same as a good business
Definition, formula, exampleReturn on Equity(ROE)
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.
ROE (%) = Net Profit ÷ Shareholders' Equity × 100
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Benchmark: Above 20% is good in most industries; treat 15% as the floor for individual stocks
Definition, formula, exampleReturn on Capital Employed(ROCE)
Return on capital employed measures operating profit earned on all the money running the business, equity and debt together.
Capital Employed = Share Capital + Total Reserves + Borrowings
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Benchmark: Use ROCE for debt-heavy companies and ROE for zero-debt ones
Definition, formula, exampleGross Margin(Gross Profit Margin)
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.
Gross Margin (%) = (Sales − Cost of Goods Sold) ÷ Sales × 100
Benchmark: Stable or rising is the signal; the level depends entirely on the industry
Definition, formula, exampleOperating Margin(EBIT Margin)
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.
Operating Margin (%) = Operating Profit (EBIT) ÷ Sales × 100
Benchmark: Compare within the sector and across five years; watch the gap to gross margin
Definition, formula, exampleEBITDA Margin
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.
EBITDA Margin (%) = EBITDA ÷ Sales × 100
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Benchmark: Useful for comparing capital-intensive peers; never mistake it for free cash
Definition, formula, exampleReturn on Assets(ROA)
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.
ROA (%) = Net Profit ÷ Total Assets × 100
Benchmark: Higher is better; a wide gap between ROE and ROA means the ROE is built on debt
Definition, formula, exampleDividend Payout Ratio
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.
Dividend Payout Ratio (%) = Total Dividends ÷ Net Profit × 100
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Benchmark: A very high payout with a very high ROE deserves suspicion
Definition, formula, exampleLeverage and Liquidity Ratios
Whether the company can carry its debt through a bad year and pay its short-term bills on time.
Debt to Equity Ratio(D/E)
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.
D/E = Total Debt ÷ Total Equity
Benchmark: The investor's ideal is zero; never apply it to banks or NBFCs
Definition, formula, exampleInterest Coverage Ratio
Interest coverage shows how many times over a company can pay its interest bill out of operating profit.
Interest Coverage = Operating Profit ÷ Interest Expense
Benchmark: Minimum 4 to 5 times for comfort; higher is better
Definition, formula, exampleQuick Ratio
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.
Quick Ratio = (Cash + Liquid Investments) ÷ Short-Term Liabilities
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Benchmark: Must be above 1
Definition, formula, exampleCurrent Ratio
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.
Current Ratio = Current Assets ÷ Current Liabilities
Benchmark: Above 1 is the floor; between 1.5 and 2 is comfortable for most manufacturers
Definition, formula, exampleNet Debt to EBITDA(Leverage Ratio)
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.
Net Debt to EBITDA = (Total Debt − Cash and Cash Equivalents) ÷ EBITDA
Benchmark: Below 1 is conservative; above 3 is stretched for most non-financial companies
Definition, formula, exampleEfficiency Ratios
How quickly assets turn into sales and how quickly sales turn back into cash.
Asset Turnover
Asset turnover measures how much sales a company generates from each rupee of assets: plant, machinery, computers, land.
Asset Turnover = Sales ÷ Total Assets
Benchmark: Higher is always better; a fall needs a cause
Definition, formula, exampleCash Conversion Cycle(Cash Cycle)
The cash conversion cycle is the number of days between paying for raw material and receiving cash from the final sale.
Cash Cycle (days) = Inventory Days + Receivable Days − Payable Days
Benchmark: Lower is better; negative is excellent
Definition, formula, exampleDuPont Analysis(ROE decomposition)
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.
ROE = Net Profit Margin × Asset Turnover × Equity Multiplier
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Benchmark: A good ROE rises through margin or turnover, not through the leverage multiplier
Definition, formula, exampleWorking Capital Days(Inventory, Receivable, and Payable Days)
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.
Inventory Days = Inventory ÷ Cost of Goods Sold × 365
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Benchmark: Low inventory and receivable days, high payable days; watch the trend more than the level
Definition, formula, exampleFixed Asset Turnover
Fixed asset turnover measures how much sales a company generates from its plant, machinery, and buildings alone, leaving out cash, inventory, and receivables.
Fixed Asset Turnover = Sales ÷ Net Fixed Assets
Benchmark: Higher is better; a drop right after a large capex is normal, a drop without one is not
Definition, formula, exampleCash Flow Checks
The tests that separate booked profit from money that actually arrived.
CFO to PAT Ratio(Cash flow from operations to net profit)
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.
CFO to PAT = Sum of 5 years' Cash Flow from Operations ÷ Sum of 5 years' Net Profit
Benchmark: Above 1, or at least above 0.8
Definition, formula, exampleFree Cash Flow(FCF)
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.
FCF = Cash Flow from Operations − Capital Expenditure
Benchmark: Positive and growing; negative FCF must be funded by debt or new equity
Definition, formula, exampleCash Flow per Share(Operating Cash Flow per Share)
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.
Cash Flow per Share = Cash Flow from Operations ÷ Number of Shares
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Benchmark: Should track EPS closely; a persistent shortfall is the CFO to PAT problem per share
Definition, formula, exampleBanking Ratios
Banks are analysed with a different ratio set. Debt to equity, cash cycle, and asset turnover do not apply.
CASA Ratio(Current Account and Savings Account Ratio)
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.
CASA (%) = (Current Account + Savings Account Deposits) ÷ Total Deposits × 100
Benchmark: Higher is better; always read it together with cost of funds
Definition, formula, exampleCost of Funds(Cost of Liabilities)
Cost of funds is the blended average interest a bank pays across every kind of deposit and borrowing it uses to fund its loans.
Cost of Funds (%) = Total Interest Paid ÷ Average Interest-Bearing Liabilities × 100
Benchmark: Lower is better; it is the check on a flattering CASA ratio
Definition, formula, exampleNet NPA Ratio(Net Non-Performing Assets)
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.
Net NPA (%) = (Gross NPAs − Provisions) ÷ Net Advances × 100
Benchmark: Lower is better; focus on net NPA, not gross
Definition, formula, exampleAdvances Growth(Loan Growth)
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.
Advances Growth (%) = (Advances This Year − Advances Last Year) ÷ Advances Last Year × 100
Benchmark: Read it with NPAs and capital adequacy; growth alone is not the achievement
Definition, formula, exampleCapital Adequacy Ratio(CAR)
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.
CAR (%) = (Tier 1 Capital + Tier 2 Capital) ÷ Risk-Weighted Assets × 100
Benchmark: 17% and above is very good; around 12% or below is a danger sign
Definition, formula, exampleNet Interest Margin(NIM)
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.
Net Interest Income = Interest Earned − Interest Paid
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Benchmark: Higher is better; distinguish it from the simple spread
Definition, formula, exampleReturn on Assets (Banks)(ROA)
Return on assets measures a bank's net profit against its total assets, which for a bank means the loans it has given out.
ROA (%) = Net Profit ÷ Average Total Assets × 100
Benchmark: 1% is the minimum; around 2% is very good
Definition, formula, exampleCommon-Size Analysis (Banks)(Line items per ₹100 of interest income)
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.
Line Item (%) = Line Item ÷ Interest Income × 100
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Benchmark: Provisions and interest expense per ₹100 of interest income are the lines that separate banks
Definition, formula, exampleGross NPA Ratio(Gross Non-Performing Assets)
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.
Gross NPA (%) = Gross Non-Performing Loans ÷ Total Advances × 100
Benchmark: Lower is better; the gap between gross and net NPA shows how much has been provided for
Definition, formula, exampleProvision Coverage Ratio(PCR)
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.
Provision Coverage Ratio (%) = Total Provisions ÷ Gross NPAs × 100
Benchmark: Higher is safer; a high ratio means the bad loans have already been paid for
Definition, formula, exampleCost to Income Ratio
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.
Cost to Income (%) = Operating Expenses ÷ (Net Interest Income + Other Income) × 100
Benchmark: Lower is better; a rising ratio at a young bank is expansion, at an old bank it is a problem
Definition, formula, exampleCredit to Deposit Ratio(CD Ratio)
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.
Credit to Deposit Ratio (%) = Total Advances ÷ Total Deposits × 100
Benchmark: Too low wastes deposits; too high means loans are funded by expensive borrowings
Definition, formula, exampleGo deeper
This section is the reference. For the reasoning behind each family of ratios, read the Financial Statement Analysis topics in Foundations. To compute them yourself from raw statements, use the Learn-by-Doing module.
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