If financial statements tell you what is happening, financial ratios tell you how good or bad it really is.
Smart investors never buy a stock without checking its key financial ratios.
1. Earnings Per Share (EPS)
EPS = Net Profit ÷ Total Shares
It shows how much profit the company makes for each share.
Higher EPS = better profitability.
2. Price to Earnings Ratio (P/E)
P/E = Share Price ÷ EPS
It tells whether a stock is:
- Cheap
- Fairly priced
- Overvalued
Low P/E may indicate undervaluation.
3. Return on Equity (ROE)
ROE = Profit ÷ Shareholder Equity
It shows how well the company uses investors’ money.
High ROE = efficient management.
4. Debt to Equity Ratio
It shows how much debt the company has compared to its own capital.
Low debt = safer business.
5. Current Ratio
Current Assets ÷ Current Liabilities
Shows if the company can pay short-term bills.
Above 1 is healthy.
6. Profit Margin
Profit ÷ Revenue
Higher margin means better control over costs.
7. Price to Book Value (P/B)
Compares market price with company’s net worth.
Low P/B may indicate undervalued stock.
How to Use Ratios Wisely
Never judge a stock on one ratio.
Compare:
- With past performance
- With competitors
- With industry average
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| Key Financial Ratios Every Investor Must Know |
FAQs – Investor Questions
Q1. Is low P/E always good?
No. It could also mean poor growth.
Q2. What is a good ROE?
Above 15% is considered strong.
Q3. Is high debt always bad?
Not always, but excessive debt increases risk.
Q4. Can ratios predict stock prices?
They show quality, not short-term price movements.
Q5. Should beginners use financial ratios?
Yes. They are the foundation of smart investing.
Final Thought
Financial ratios are the x-ray of a
company.
They help you see what is hidden behind the stock price and make confident
investment decisions.
