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Numbers on a balance sheet mean nothing in isolation. Financial ratios turn raw data into actionable signals — letting you compare any two companies, in any sector, in seconds.
Module 3 of 4 in Fundamental Analysis
TCS reported ₹46,000 Cr profit last year. Is that good or bad? Without context, you have no idea. But if you know their ROE is 45%, ROCE is 55%, P/E is 28x, and Debt-to-Equity is essentially zero — now you're speaking the language of fundamental analysis.
Financial ratios compress complex financial statements into a handful of numbers you can benchmark across companies, sectors, and time periods. They're the first thing every serious investor checks before reading anything else about a company.
Learn the most widely used valuation metric in investing — how to calculate it, when it misleads you, and how to use PEG ratio for growth context.
Discover how efficiently a company uses your money. Understand DuPont analysis and why Warren Buffett obsesses over Return on Equity.
Analyse Debt-to-Equity, Interest Coverage, and Current Ratio to understand if a company's balance sheet can weather a storm.
Understand Earnings Per Share growth and Price-to-Book ratio — two critical metrics for spotting undervalued stocks in any market cycle.
| Ratio | Good Signal | Red Flag | Best For |
|---|---|---|---|
| P/E | Below sector avg + growing earnings | Negative EPS or sky-high P/E with slow growth | Valuation vs peers |
| ROE | 20%+ consistently, low debt | High ROE + very high D/E (debt-inflated) | Profitability quality |
| ROCE | Higher than cost of borrowing | ROCE < interest rate on debt | Capital efficiency |
| D/E | Below 1x for most sectors | Rising debt + falling earnings | Balance sheet risk |
| ICR | Above 3x | Below 1.5x — danger zone | Debt servicing ability |
| EPS Growth | Consistent 15%+ CAGR | Declining or erratic EPS | Earnings momentum |
| P/B | Below 1x for asset-heavy cos | Very high P/B + low ROE | Asset-heavy sectors |