7 Must-Know Stock Market Ratios
- Why Financial Ratios Matter?
- Quick Reference Table
- How to Use These Ratios Together?
- Common Mistakes to Avoid
- Conclusion
- Frequently Asked Questions
Scroll through any stock page on a trading app and you’ll see a wall of numbers — P/E, P/B, ROE, D/E, EPS, and more. To a beginner, it can look like a foreign language. But these numbers aren’t there to confuse you; each one answers a specific, useful question about whether a company is fairly priced, financially healthy, or profitable.
In this blog, we’ll understand seven commonly used financial ratios that can help investors evaluate companies, explained in simple language with easy examples — so the next time you check a stock on the Navia All in One App, those numbers will actually mean something to you.
Why Financial Ratios Matter?
A stock’s price on its own tells you almost nothing. A ₹50 stock isn’t automatically “cheap,” and a ₹5,000 stock isn’t automatically “expensive” — what matters is the price relative to the company’s earnings, assets, debt, and profitability. That’s exactly what financial ratios do: they take raw numbers from a company’s financial statements and turn them into comparisons that actually mean something.
No single ratio tells the whole story, though. The real skill is learning to read a few of them together — which is exactly what this guide will help you do.
1. Price-to-Earnings (P/E) Ratio
What it tells you: How much investors are willing to pay today for every ₹1 of the company’s current earnings.
Formula: P/E Ratio = Share Price ÷ Earnings Per Share (EPS)
Example: If a company called XYZ Ltd. trades at ₹200 and its EPS is ₹10, its P/E ratio is 20. This means investors are paying ₹20 for every ₹1 the company earns per year.
How to read it: A high P/E often suggests the market expects strong future growth — but it can also mean the stock is overpriced relative to what it currently earns. A low P/E can indicate an undervalued stock — or it can be a warning sign that the market doubts the company’s future prospects. P/E is most useful when you compare it to the company’s own historical average and to other companies in the same sector, rather than looking at the number in isolation.
2. Price-to-Book (P/B) Ratio
What it tells you: How much investors are paying for each ₹1 of the company’s net asset value (what would theoretically be left over if the company sold everything it owns and paid off everything it owes).
Formula: P/B Ratio = Share Price ÷ Book Value Per Share
Example: If ABC Ltd.’s book value per share is ₹50 and its market price is ₹150, its P/B ratio is 3 — meaning investors are paying three times the company’s accounting net worth.
How to read it: A P/B below 1 can mean a stock is undervalued relative to its assets — or it can mean the market has real doubts about the company’s future. A high P/B is common for asset-light, brand-driven, or high-growth businesses, since book value doesn’t capture things like brand strength or intellectual property. P/B tends to matter more for asset-heavy businesses (like banks or manufacturers) than for service-based companies.
3. Return on Equity (ROE)
What it tells you: How efficiently a company turns shareholders’ money into profit.
Formula: ROE = Net Income ÷ Shareholders’ Equity (%)
Example: If PQR Ltd. reports a net profit of ₹24 lakh and its shareholders’ equity is ₹120 lakh, its ROE is 20% — meaning it generated ₹20 of profit for every ₹100 of shareholders’ capital.
How to read it: A consistently strong ROE, compared to industry peers and the company’s own history, is often a sign of efficient management. But watch out for one trap: a company can inflate its ROE simply by taking on more debt rather than by being genuinely more profitable. That’s why ROE is best read alongside the debt-to-equity ratio, not on its own.
4. Debt-to-Equity (D/E) Ratio
What it tells you: How much of a company’s funding comes from borrowed money (debt) versus money invested by shareholders (equity).
Formula: D/E Ratio = Total Debt ÷ Shareholders’ Equity
Example: If LMN Ltd. has total debt of ₹200 crore and shareholders’ equity of ₹100 crore, its D/E ratio is 2 — meaning it has twice as much debt as equity.
How to read it: There’s no single “correct” D/E ratio — capital-intensive sectors like utilities, infrastructure, or manufacturing naturally run higher debt levels than asset-light sectors like IT services. A high D/E isn’t automatically bad, since debt can fuel growth, but it does mean the company is more exposed to rising interest rates and tougher economic conditions. Compare D/E within the same industry, and alongside profitability, rather than treating it as a stand-alone red flag.
5. Earnings Per Share (EPS)
What it tells you: How much net profit a company has earned for each individual share outstanding.
Formula: EPS = Net Profit ÷ Total Number of Outstanding Shares
Example: If DEF Ltd. earns a net profit of ₹50 crore and has 5 crore shares outstanding, its EPS is ₹10 per share.
How to read it: EPS is most useful for tracking a company’s profitability over time—a steadily rising EPS across quarters or years generally signals improving earnings performance. However, it’s less effective for comparing different companies, as variations in outstanding shares can lead to significantly different EPS figures despite similar overall profits. EPS also serves as the foundation for calculating the P/E ratio, which is why the two metrics are often analyzed together.
6. Dividend Yield
What it tells you: How much cash return a shareholder receives through dividends, relative to the current share price.
Formula: Dividend Yield = Annual Dividend Per Share ÷ Current Market Price × 100
Example: If a company pays an annual dividend of ₹6 per share and its stock trades at ₹120, the dividend yield is 5% — meaning you’d earn ₹5 in dividend income for every ₹100 invested, at the current price.
How to read it: A high dividend yield can be genuinely attractive for income-focused investors — but be careful of a “yield trap,” where the yield looks high simply because the share price has fallen sharply, not because the company is generous with payouts. Dividend yield should always be checked alongside the company’s underlying profitability, since a dividend can be reduced or stopped entirely if earnings decline.
7. Current Ratio
What it tells you: Whether a company has enough short-term (current) assets to cover its short-term (current) liabilities — essentially, its immediate liquidity health.
Formula: Current Ratio = Current Assets ÷ Current Liabilities
Example: If a company’s current assets total ₹80 crore and its current liabilities total ₹40 crore, its current ratio is 2 — meaning it has twice the short-term assets needed to cover its short-term obligations.
How to read it: Generally, a current ratio above 1 suggests a company can comfortably meet its near-term obligations, while a ratio below 1 can be a warning sign of potential short-term liquidity stress. That said, an extremely high current ratio isn’t automatically great either — it can sometimes mean the company is sitting on idle cash or excess inventory instead of deploying capital productively.
Quick Reference Table
| Ratio | What It Measures? | Generally Favorable Signal |
|---|---|---|
| P/E Ratio | Price relative to earnings | Reasonable compared to industry peers and history |
| P/B Ratio | Price relative to net assets | Below industry average, without ignoring the reason why |
| ROE | Profitability on shareholders’ equity | Consistently strong and stable vs. peers |
| D/E Ratio | Debt relative to equity | Lower than industry peers, or well-justified by growth |
| EPS | Profit per share | Steadily rising over time |
| Dividend Yield | Cash return relative to price | Attractive, but backed by stable earnings |
| Current Ratio | Short-term liquidity | Comfortably above 1 |
How to Use These Ratios Together?
No single ratio should ever be your only reason to buy or avoid a stock. A practical way to combine them:
- Start with valuation — P/E and P/B tell you whether you’re paying a fair price.
- Check profitability — ROE and EPS tell you whether the company is actually good at making money.
- Assess financial health — D/E and the Current Ratio tell you how much risk the company is carrying.
- Layer in income potential, if relevant — Dividend Yield matters more if you’re investing for regular income rather than pure growth.
A stock that looks expensive on P/E alone might be entirely justified by an exceptional ROE and steadily rising EPS. Conversely, a “cheap” stock on P/E or P/B might be cheap for a good reason — like weak profitability or a shaky balance sheet. Reading these ratios together, rather than one at a time, can help investors evaluate a company more comprehensively before making an investment decision.
Common Mistakes to Avoid
❌ Judging a stock by a single ratio. A low P/E or P/B in isolation can be a value opportunity — or a trap. Always cross-check with profitability and debt metrics before drawing a conclusion.
❌ Comparing ratios across different industries. A P/E or D/E ratio that looks alarming in one sector can be completely normal in another. Always compare within the same industry.
❌ Ignoring the trend over time. A single quarter’s ratio can be misleading. Look at how EPS, ROE, and other ratios have moved over several years to understand the real trajectory.
❌ Chasing high dividend yield without checking earnings. A yield that looks unusually generous is often a sign of a falling share price or an unsustainable payout, not genuine shareholder-friendliness.
❌ Assuming high ROE always means efficient management. Check the debt-to-equity ratio alongside ROE — heavy borrowing can inflate ROE without reflecting real operational improvement.
Conclusion
These 7 ratios — P/E, P/B, ROE, Debt-to-Equity, EPS, Dividend Yield, and Current Ratio — form a practical starting toolkit for evaluating any stock, whether you’re a first-time investor or someone refining an existing portfolio. None of them works in isolation, and none of them replaces genuine research into a company’s business model, management, and industry position. But together, they give you a structured, numbers-based way to ask the right questions before you invest — rather than relying on price movements or headlines alone.
The next time you look up a stock on the Navia All in One App, take a moment to check these seven numbers alongside the price chart. It can help investors evaluate companies in a more structured manner before making investment decisions.
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Frequently Asked Questions
Which is the most important stock market ratio for beginners?
There isn’t one single “most important” ratio — P/E is the most commonly referenced starting point for valuation, but it should always be read alongside profitability ratios like ROE and risk indicators like the debt-to-equity ratio.
Is a low P/E ratio always a good sign?
Not necessarily. A low P/E can indicate an undervalued stock, but it can also reflect genuine concerns the market has about the company’s future earnings — so it should be checked alongside other ratios before drawing a conclusion.
What does a high debt-to-equity ratio mean for a stock?
It means the company relies more heavily on borrowed money than on shareholder funds. This isn’t automatically bad — capital-intensive industries often run higher D/E ratios — but it does increase the company’s exposure to interest rate changes and economic downturns.
Why does dividend yield sometimes look artificially high?
This usually happens when a stock’s price has fallen sharply, making the same dividend amount look like a larger percentage of the current price. It’s important to check whether the underlying earnings can actually sustain that dividend.
Can these ratios be used for mutual funds too?
Mutual funds are typically evaluated using different metrics, such as expense ratio, portfolio composition, investment objective, portfolio quality and other fund-specific parameters.
Where can I find these ratios for a stock I’m interested in?
Most trading apps, including the Navia All in One App, display key ratios like P/E, P/B, ROE, and dividend yield directly on a stock’s information page, alongside the company’s quarterly and annual financial statements.
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