📊 Capital Market Chronicles – Episode 126: INTRODUCTION TO FINANCIAL RATIOS (Part I)
Welcome to the world of financial ratios—the enchanted toolkit that investors, analysts, and spreadsheet-wielding sorcerers use to divine the health and future of companies. 🧙♂️📈
Think of these ratios as the “vital signs” of a business. Just like a doctor checks your temperature and pulse, analysts poke at balance sheets and income statements using these handy tools to assess a company's financial health, profit potential, and whether it’s a shining gem 💎 or a glittery trap ✨💀.
Let’s unwrap these one by one—without making your brain melt like bad cheese.
1. Earnings Per Share (EPS)
💡 Profit per share of common stock.
🧾 Formula:
(Net Income – Preferred Dividends) / Avg. Outstanding Shares
📈 If EPS were a contestant on a reality show, it would be the one shouting, “Look how much I earned just for you, dear shareholder!”
Why It Matters:
EPS tells you how much of the company’s net profit belongs to each common share you own. Higher EPS? Great! Your little piece of the pie just got fatter. 🥧💰
"EPS is like the company saying: ‘Here’s your share of the party cake. Dig in.’”
2. Price-to-Earnings (P/E) Ratio
💡 Is the stock overpriced or just popular?
🧾 Formula:
Stock Price / EPS
👀 If your crush (read: stock) is high on looks but low on substance, the P/E ratio will tell you the harsh truth.
Why It Matters:
This shows how much investors are willing to pay for ₹1 of earnings. A high P/E might mean optimism, or irrational enthusiasm. A low P/E might scream "bargain!" or "beware!"—depends on the backstory. 🤔
"Think of it as how expensive a stock’s story is. Are you buying Shakespeare or gossip tabloid?"
3. Market Capitalisation (Market Cap)
💡 How big is your company?
🧾 Formula:
Stock Price × Total Shares Outstanding
🏢 Big, small, or somewhere in between – this one's the company's measuring tape.
Why It Matters:
This is the big fat number that shows the total market value of a company. It helps investors group companies as large-cap (corporate giants 🦖), mid-cap (ambitious climbers 🐆), or small-cap (sprightly startups 🐿️).
“Market cap is basically a company’s size measured in financial girth.”
4. Price-to-Sales (P/S) Ratio
💡 What are you paying for every ₹ of sales?
🧾 Formula:
Stock Price / Sales per Share
🍋 Overpaying for lemonade? This ratio will let you know.
Why It Matters:
This tells you how much you're paying for each rupee of sales. Low P/S? Possibly undervalued. High P/S? Either booming future or a hot air balloon of hype. 🎈
“Because sometimes it’s not just what you earn—it’s how much you’re selling that counts.”
5. Price-to-Book (P/B) Ratio
💡 What are you paying for every ₹ of net assets?
🧾 Formula:
Stock Price / Book Value per Share
📚 Book value = What’s left if everything was sold and debts paid. Investors love a good deal, and this tells you if you're getting one.
Why It Matters:
The book value is what a company would be worth if it were liquidated today (like a garage sale but for corporations). This ratio tells you if the stock is priced above or below that liquidation value.
“It’s like asking: If we sold everything and paid the bills, how much is left for the shareholders?
6. Dividend Payout Ratio
💡 How generous is the company?
🧾 Formula:
Dividends per Share / EPS
💸 Like your friend who always picks up the tab – or never does.
Why It Matters:
This tells you how much of the company’s profit it’s sharing with shareholders. High payout? Great if you love dividends. Low payout? Maybe the company is reinvesting for growth.
“Like deciding whether to spend your bonus on pizza today or invest in a treadmill for tomorrow.”
7. Dividend Yield
💡 What’s your dividend return, percentage-wise?
🧾 Formula:
Annual Dividends per Share / Stock Price
🏦 Want income from your stocks? This tells you how much pocket money you're getting.
Why It Matters:
This is your return from dividends, expressed as a percentage. If your investment were a cow, this is the milk it gives you regularly. 🐄💸
“Because some investors want cash now, not just dreams of capital appreciation.”
8. Book Value
💡 Net worth of the company.
🧾 Formula:
Total Assets – Total Liabilities
👻 If the company vanished tomorrow, this is what’s left after paying the bills.
Why It Matters:
The book value is like the equity leftover if the business shut down tomorrow. It's also a baseline to compare the stock price against—are you paying too much, or getting a deal?
“Like checking what’s left in your wallet after settling all your bills.”
9. Return on Equity (ROE)
💡 How efficiently is the company using your money?
🧾 Formula:
Net Income / Shareholder’s Equity
📈 It's like checking how good your house is at making you rental income.
Why It Matters:
ROE shows how efficiently a company turns shareholder money into profits. High ROE? The company is putting your money to work like a caffeinated intern. ☕🚀
“It’s like asking: ‘For every ₹1 I invested, how many rupees did you squeeze out?’”
10. Price/Earnings to Growth ratio (PEG)
💡 Is the stock growth justified by its price?
🧾 Formula:
P/E Ratio / Earnings Growth Rate
🚀 A growth stock’s reality check. Because high hopes are great—until the earnings don’t show up.
Why It Matters:
This adjusts the P/E ratio by how fast the company is growing. A low PEG may indicate an undervalued growth stock, while a high one might suggest you're paying too much for potential.
“P/E tells you if the stock is pricey. PEG tells you if it’s worth it.”
11. Interest Coverage Ratio
💡 Can the company pay interest, or is it borrowing from its cousin to pay rent?
🧾 Formula:
EBIT / Interest Expenses
💣 A low number = potential debt disaster. Stay alert, not alarmed!
Why It Matters:
This tells you how easily the company can pay its interest bills. Low coverage? Red flag 🚩. High coverage? The company’s not losing sleep over loans.
“Because if interest payments are monsters, EBIT is the monster slayer.”
12. Liquidity Ratios (Current & Quick)
🧾 Current Ratio:
Current Assets / Current Liabilities
🧾 Quick Ratio:
(Current Assets – Inventory) / Current Liabilities
💧These ratios check if a company can survive a short-term cash crunch – kind of like finding coins in your couch before payday.
Why They Matter:
These measure a company’s short-term survival skills. Can it pay upcoming bills without selling its furniture? The quick ratio skips inventory (which might take time to sell), giving a sharper view.
“Because liquidity is sexy—especially when creditors come knocking.”
🧠 In Summary:
Financial ratios are not just geeky equations — they’re X-rays for your investments. They slice through the surface glamour of stock prices to show what’s really going on beneath. Whether you're a cautious tortoise 🐢 or a high-speed hare 🐇 in the market, knowing these ratios gives you a strategic edge.
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