5 Financial Ratios You Must Know for Investing

Before buying a stock for long-term holding, it is crucial to analyze the company's financial records. Fundamental analysis helps you determine whether a stock is fairly valued and whether the business is financially stable. Here are 5 critical financial ratios every investor should check before investing.

1. Price-to-Earnings (P/E) Ratio

The P/E ratio compares a company's share price to its earnings per share (EPS). It indicates how much investors are willing to pay for every ₹1 of profit. A very high P/E compared to sector peers might suggest the stock is overvalued, while a low P/E could signal value.

2. Return on Equity (RoE)

RoE measures a company's profitability by showing how much profit it generates with the money shareholders have invested. A high and consistent RoE (above 15-20%) shows management is highly efficient at generating profits from equity capital.

“Ratios are clues. A single ratio doesn't tell the whole story; compare them over multiple years and against industry competitors.”

3. Debt-to-Equity (D/E) Ratio

This ratio measures the proportion of debt a company uses relative to its equity. High debt can put a business at risk during economic downturns. Ideally, look for companies with a Debt-to-Equity ratio of less than 1 (or preferably zero debt).

4. Operating Profit Margin (OPM)

OPM indicates what percentage of revenue remains after paying for operating costs. A high or increasing operating margin demonstrates that the business has pricing power and good cost control.