Financial Ratios for Stock Analysis: PE, ROE, ROCE

What financial ratios are and why they matter for stock analysis

Financial ratios are simple fractions that take the large numbers buried inside a company's financial statements and turn them into a handful of comparable measures. Instead of staring at a profit of thousands of crores or a share price of a few hundred rupees on their own, you divide one number by another and get a clean figure you can actually reason about. That single act of division is what makes financial ratios the working language of fundamental analysis, used by retail investors, fund managers and analysts across the NSE and BSE alike.

Every listed Indian company files three core statements: the profit and loss statement (often called the P&L), which shows how much it earned and spent over a period; the balance sheet, which is a snapshot of what it owns and owes on a given date; and the cash flow statement, which tracks the actual cash moving in and out. Companies report these every quarter and again for the full financial year (April to March), and SEBI rules require them to be public. Financial ratios are simply recipes that combine items from these three statements.

Why bother with ratios at all when you can read the raw numbers? Because raw numbers are not comparable. A company that earns ₹10,000 crore of profit is not automatically better than one that earns ₹1,000 crore, because the first might have ten times the capital tied up to produce it. Ratios strip out the effect of size. They let you stand a giant like Reliance Industries next to a mid sized peer and ask a fair question: for every rupee invested, who earns more, who carries more debt and who is priced more richly?

It helps to think of financial ratios in three families. Valuation ratios such as PE and EPS based measures tell you how the market is pricing the business. Profitability ratios such as ROE, ROCE and the profit margins tell you how good the business is at making money. Solvency and liquidity ratios such as debt to equity and the current ratio tell you how safe the balance sheet is. A complete view needs all three families, because a cheap company that is unprofitable, or a profitable company drowning in debt, can both be poor investments. Everything that follows is meant as education to sharpen your own analysis, not as advice to buy or sell any stock.

Earnings per share (EPS): the number every other ratio rests on

Earnings per share is the foundation, so it is worth getting right before anything else. EPS is the company's net profit (the bottom line, after every expense, interest and tax) divided by the number of equity shares outstanding. It answers a very direct question: of all the profit the company made, how much belongs to a single share that you might own?

Take a worked example. Suppose a company reports a net profit of ₹6,000 crore for the year and has 600 crore shares outstanding. Its EPS is ₹6,000 crore divided by 600 crore shares, which equals ₹10 per share. If the same company grows profit to ₹7,200 crore next year with the share count unchanged, EPS rises to ₹12, a 20 percent increase. That growth in EPS, year after year, is the engine behind long term returns, because share prices ultimately follow earnings.

You will meet two versions of EPS. Basic EPS uses the current share count. Diluted EPS assumes that every instrument that could become a share, such as employee stock options and convertible bonds, actually does, which spreads the same profit over more shares and gives a slightly lower, more conservative figure. Analysts usually prefer diluted EPS. You will also see trailing EPS, based on the last twelve months of reported results, and forward EPS, based on estimates for the year ahead. Always check which one a website is quoting before you compare two companies.

One India specific point that confuses beginners is face value. The face value of a share (often ₹1, ₹2, ₹5 or ₹10) is just an accounting unit and has nothing to do with the market price or the quality of the business. When a company does a stock split, it cuts the face value and multiplies the share count, so EPS falls mechanically even though nothing real changed. Never compare EPS across two companies as if a bigger rupee EPS means a better business. EPS is only useful when paired with the price you pay for it, which is exactly what the PE ratio does.

The PE ratio: how much you pay for each rupee of earnings

The price to earnings ratio, written as PE, is the most quoted of all financial ratios, and for good reason. It is the market price of one share divided by the earnings per share. If a share trades at ₹1,200 and its EPS is ₹40, the PE is ₹1,200 divided by ₹40, which equals 30. The plain English reading is that you are paying ₹30 today for every ₹1 of annual profit the business currently earns for a share.

A high PE is not automatically expensive and a low PE is not automatically cheap. PE captures the market's expectation of future growth. A fast growing IT or consumer company might trade at a PE of 40 or 50 because investors expect its earnings to keep climbing, so today's price looks reasonable against tomorrow's profit. A slow growing or cyclical business such as a metal producer might trade at a PE of 8 or 10 because earnings are flat or unpredictable. Comparing the PE of an FMCG leader with the PE of a steel maker tells you almost nothing useful, because they live in different worlds.

Flip the PE upside down and you get the earnings yield: EPS divided by price, expressed as a percentage. A PE of 25 is an earnings yield of 4 percent (1 divided by 25). This is a handy way to compare a stock against the return on a fixed deposit or a government bond. If a safe deposit pays close to the earnings yield of a risky stock, the stock has to offer growth to be worth the extra risk. Many disciplined investors use earnings yield exactly this way as a sanity check.

It also pays to widen the lens to the whole market. Indian investors often track the PE of the Nifty 50 or the Sensex as a gauge of overall valuation: when the index PE sits well above its own long term average, the market as a whole is priced for optimism, and when it sits below, fear is setting prices. A single stock can be cheap inside an expensive market or dear inside a cheap one, so glancing at the index PE first gives you a backdrop that makes an individual company's multiple far easier to judge.

A common trap is the falling PE that looks like a bargain. If a company's profit is collapsing, its EPS drops, and a price that has not yet fallen as fast will show a low PE. The stock looks cheap but is actually a value trap, because next year's earnings could be far lower. The opposite trap is the very high PE on a tiny EPS: a single weak quarter can send the PE to absurd levels even when the business is fine. Always look at the trend in EPS alongside the PE, never the PE alone.

Return on equity (ROE): how hard the owners' money works

Return on equity measures how much profit a company generates for every rupee of shareholders' money invested in it. The formula is net profit divided by shareholders' equity, where equity is the owners' stake on the balance sheet (share capital plus all the retained profits the company has kept over the years). ROE is the single best one number answer to the question every owner cares about: is my capital being put to good use?

Here is a worked example. Imagine a company with shareholders' equity of ₹50,000 crore that earns a net profit of ₹10,000 crore in a year. Its ROE is ₹10,000 crore divided by ₹50,000 crore, which equals 20 percent. In plain terms, the business turned every ₹100 of owners' money into ₹20 of profit that year. Sustained ROE above roughly 15 percent, held for many years, is often a sign of a genuinely good business with some durable advantage, what investors call a moat. A company that compounds equity at 20 percent for a decade builds enormous value for patient holders.

ROE varies a lot by sector, so judge it in context. Strong consumer and IT companies in India regularly post ROE above 25 percent because they need little capital to grow. Banks and lenders look different, because the very nature of their business uses a lot of borrowed money. A well run private bank might show an ROE near 15 to 18 percent, and that can be excellent for banking even though it would be ordinary for an asset light software firm. Always compare a bank's ROE with other banks, not with an FMCG company.

The big caution with ROE is leverage. Because equity sits in the denominator, a company can lift its ROE simply by borrowing more and shrinking the equity portion of its funding. Two companies can both show 20 percent ROE while one is rock solid and the other is dangerously indebted. That is exactly why ROE should never be read on its own. You pair it with a debt measure and, better still, with ROCE, which we turn to next.

Return on capital employed (ROCE): the quality test that debt cannot fake

Return on capital employed is, for many serious analysts, the most revealing single profitability ratio. ROCE is operating profit (earnings before interest and tax, often written as EBIT) divided by capital employed, where capital employed is the total long term money funding the business, that is shareholders' equity plus borrowings. Because the denominator includes both equity and debt, ROCE measures the return on all the capital at work, no matter where it came from.

This is the key difference from ROE. ROE can be flattered by piling on debt, but ROCE cannot, because adding debt increases the capital employed in the denominator at the same time. As a result ROCE gives you a cleaner, leverage neutral read on how good the underlying business really is at turning capital into operating profit. When you want to compare two companies that fund themselves very differently, ROCE is the fairer yardstick.

A worked example makes it concrete. Suppose a manufacturer has equity of ₹40,000 crore and debt of ₹20,000 crore, so capital employed is ₹60,000 crore, and it earns operating profit (EBIT) of ₹12,000 crore. Its ROCE is ₹12,000 crore divided by ₹60,000 crore, which equals 20 percent. The crucial follow up is to compare that 20 percent with the company's cost of capital, roughly the blended rate it pays to lenders and the return shareholders expect. If ROCE comfortably exceeds the cost of capital, the company is creating value every time it invests. If ROCE sits below its cost of capital, the company is destroying value even while it reports a profit.

As a rough guide, a consistently high ROCE (say above 20 percent) sustained across several years points to a business with pricing power and efficient use of assets. A low or falling ROCE, especially when it dips under the cost of capital, is a warning that growth is being bought with expensive capital rather than earned. ROCE and ROE read together are powerful: when both are high and close to each other, the business is profitable and not relying on heavy borrowing to look good.

Debt to equity: reading the balance sheet for risk

The debt to equity ratio is the headline measure of financial risk. It is total borrowings divided by shareholders' equity, and it tells you how much of the business is funded by lenders versus owners. A debt to equity of 0.5 means the company has ₹0.50 of debt for every ₹1 of owners' capital. A ratio of 2 means ₹2 of debt for every ₹1 of equity, a far more aggressive and fragile structure.

Why does this matter so much? Debt is a fixed claim. Interest must be paid in good years and bad, and the principal must eventually be repaid. A lightly indebted company can ride out a recession, a demand slump or a rise in interest rates. A heavily indebted company can be pushed toward distress by the same shock, because its interest bill keeps growing even as profit shrinks. In the Indian market, several once admired companies ran into deep trouble not because their products failed but because their balance sheets were stretched when conditions turned.

Sector context is everything here too. A strong IT services company such as a large software exporter often carries almost no debt, so a debt to equity near zero is normal and healthy. Capital heavy businesses such as power, infrastructure and telecom naturally run higher debt because they must build expensive assets up front. Banks and non banking finance companies (NBFCs) are a special case: borrowing is their raw material, so their debt to equity looks enormous by ordinary standards and is measured with different tools such as capital adequacy. Never apply a manufacturer's debt yardstick to a lender.

Pair debt to equity with the interest coverage ratio for a fuller picture. Interest coverage is operating profit (EBIT) divided by the annual interest expense, and it shows how many times over the company can pay its interest from its operating earnings. A coverage of 8 means EBIT is eight times the interest bill, which is comfortable. A coverage near 1.5 or below means almost all operating profit is being eaten by interest, a dangerous spot if earnings dip even slightly. High debt with thin coverage is one of the clearest red flags in all of fundamental analysis.

Profit margins: gross, operating and net

Margins tell you how much of every rupee of sales the company actually keeps as profit at different stages. There are three you should know. Gross margin is gross profit (revenue minus the direct cost of goods sold) divided by revenue. Operating margin is operating profit (EBIT) divided by revenue, after running costs such as salaries, marketing and administration. Net margin is net profit divided by revenue, after interest and tax. Reading all three together shows you where the money is made and where it leaks away.

A worked example clarifies the layers. Suppose a company has revenue of ₹1,00,000 crore. If gross profit is ₹40,000 crore, gross margin is 40 percent. If operating profit is ₹20,000 crore, operating margin is 20 percent. If net profit is ₹14,000 crore, net margin is 14 percent. The gap between gross and operating margin reveals how heavy the company's overheads are, and the gap between operating and net margin reveals how much interest and tax take out. A fat gross margin that shrinks to a thin net margin tells you costs or debt are doing the damage.

Margins are most useful as a trend and as a peer comparison. Rising margins over several years usually mean the company is gaining pricing power, scale or efficiency. Falling margins can signal rising input costs, tougher competition or discounting to hold market share. A premium paints company or a leading FMCG brand tends to enjoy high, stable margins because customers pay up for the brand. A commodity producer lives with thin, volatile margins set by global prices it cannot control.

Compare margins the right way across time. Many Indian businesses are seasonal, so a consumer or paints company can post a strong festive quarter and a softer monsoon quarter every year. Reading one quarter against the previous quarter can therefore mislead, while comparing a quarter against the same quarter a year earlier (year on year) strips out that seasonality. For cyclical sectors such as metals, sugar or cement, even a full year of fat margins can mark the top of a cycle rather than a permanent gain, so always ask whether today's margin is normal or a temporary peak.

Watch for the difference between EBITDA margin and net margin. EBITDA adds back depreciation and amortisation to operating profit, so it looks flattering, especially for asset heavy companies that spend a lot on plant and machinery. Promoters and presentations love to highlight EBITDA margin because it is the biggest number. A careful investor checks how much of that EBITDA survives once depreciation, interest and tax are taken out, because that net figure is what actually flows to shareholders.

Liquidity: the current ratio and quick ratio

Liquidity ratios answer a short term survival question: can the company pay the bills that fall due within the next year? The current ratio is current assets (cash, receivables, inventory and other items expected to convert to cash within a year) divided by current liabilities (dues payable within a year, such as supplier payments and short term loans). A current ratio of 2 means the company has ₹2 of near term assets for every ₹1 of near term dues.

A worked example: if current assets are ₹30,000 crore and current liabilities are ₹15,000 crore, the current ratio is 2. As a rough rule, a current ratio between 1.5 and 2 is comfortable for most manufacturing and trading businesses, showing a healthy buffer without too much idle cash. A current ratio below 1 means short term dues exceed short term assets, which can signal a cash crunch, though some efficient businesses run lean on purpose. A very high ratio, say above 4, can mean the company is hoarding cash or stuck with slow moving inventory rather than investing for growth.

A useful companion to the current ratio is the cash conversion cycle, which measures how many days cash is tied up between paying suppliers and collecting from customers. It adds the days inventory sits in stock and the days customers take to pay, then subtracts the days the company takes to settle its own suppliers. A short or even negative cycle, common for strong FMCG and retail businesses that collect cash before they pay suppliers, is a quiet sign of real bargaining power and frees up cash that would otherwise sit idle in working capital.

The quick ratio (also called the acid test) is stricter. It removes inventory from current assets before dividing by current liabilities, because inventory can be hard to sell quickly at full value in a crisis. If a company's current ratio looks fine but its quick ratio is weak, a lot of its short term strength is tied up in stock on the shelves, which is a more fragile position. Comparing the two ratios shows how much the company depends on selling inventory to meet its obligations.

As always, sector context matters. A software services company collects cash quickly and holds almost no inventory, so its quick ratio and current ratio are nearly the same. A retailer or a consumer goods company naturally carries large inventory, so a lower quick ratio is normal. Judge liquidity against the company's own past and its direct peers, not against a single textbook number.

Valuation beyond PE: price to book, dividend yield and PEG

PE is not the only valuation ratio worth knowing. The price to book ratio (PB) is the market price per share divided by the book value per share, where book value is shareholders' equity divided by the number of shares. PB is especially useful for banks and lenders, whose value sits largely in financial assets carried on the balance sheet. A bank trading at a PB of 1 is priced at its net worth, while a strong franchise might command a PB of 3 because the market expects it to keep earning high returns on that book.

Dividend yield is dividend per share divided by the market price, expressed as a percentage. If a share priced at ₹500 pays an annual dividend of ₹15, the dividend yield is 3 percent. Yield matters most to investors who want regular income, and it can act as a soft floor under a stock's price. Be careful with an unusually high yield though: it sometimes appears because the price has crashed, not because the company is generous, and the dividend itself may be at risk of being cut.

The PEG ratio puts growth into the PE. It is the PE divided by the expected earnings growth rate. A company with a PE of 30 that is growing earnings at 30 percent a year has a PEG of 1, which many investors consider fair. A PE of 30 on a company growing at just 10 percent gives a PEG of 3, which looks stretched. PEG is a quick way to ask whether a high PE is justified by genuine growth or simply by hope. It relies on growth estimates, though, so it is only as reliable as those forecasts.

No valuation ratio is a verdict on its own. PB ignores intangible strengths such as brands and software, dividend yield ignores companies that wisely reinvest instead of paying out, and PEG depends on uncertain forecasts. Use them as a panel of views. When PE, PB, dividend yield and PEG all point the same way, your conclusion is far sturdier than when you lean on one number.

A worked comparison: why you cannot read ratios in isolation

Let us put the ideas together with two illustrative companies, framed clearly as examples rather than real reported figures. Picture an IT services exporter and a private bank, and assume the following round numbers purely to show the method. The IT company shows a PE of 28, ROE of 30 percent, ROCE of 35 percent, debt to equity near zero and a net margin of 20 percent. The bank shows a PE of 18, ROE of 17 percent, ROCE that is not directly comparable, a very high debt to equity by ordinary standards and a different margin structure entirely.

A beginner might glance at this and conclude the bank is cheaper (lower PE) and the IT company is over leveraged is wrong, because the bank carries far more debt. Both reads are mistakes born of comparing across sectors. The IT company's near zero debt is normal and excellent for software. The bank's huge borrowing is simply how banking works, since deposits and borrowings are the raw material it lends out at a spread. The IT company's higher PE reflects its asset light, high return model, while the bank's lower PE reflects the market's caution about credit cycles.

The correct method is to compare each company only against its own peers and its own history. Stand the IT exporter beside other large IT exporters and ask who has the higher ROCE and the steadier margin. Stand the bank beside other private banks and ask who has the better return on assets, the lower bad loan ratio and the stronger capital position. Cross sector ratio comparisons are one of the most common and most expensive beginner errors in fundamental analysis.

This is also where ratios connect to the bigger story. Numbers tell you what happened; they do not explain why. A high ROCE invites the next question: what protects it? A strong brand, a low cost position, a network effect, a regulatory licence? A low debt to equity invites the question: is management conservative by choice, or simply not investing in growth? Ratios are the start of the investigation, not the end.

Comparing within the sector: context turns numbers into insight

The single most important habit in ratio analysis is comparison within the same sector. A PE of 22 means nothing in the abstract. A PE of 22 when the sector median is 35 might flag a relative bargain or a company the market distrusts; a PE of 22 when the sector median is 12 flags a premium that needs justifying. Always gather the same ratio for three to five close peers before you form a view on any one company.

Add a second axis: the company's own history. Pull the PE, ROE, ROCE and margins for the last five to ten years and see where today's number sits in that range. A company trading near the bottom of its own ten year PE band, with profitability intact, tells a different story from one trading near the top of its range on optimism. This historical context guards you against paying a record high multiple just because a stock is popular right now.

When you compare peers, prefer the median over the average. A single extreme company, perhaps one with a one time spike in profit, can drag a simple average far from reality, while the median (the middle company) is more robust. Make sure you are comparing like with like as well: use consolidated figures for groups with many subsidiaries, and standalone figures only when you specifically want the parent company alone. Mixing the two quietly corrupts every ratio you calculate.

Finally, line the ratios up side by side rather than reading them one at a time. A simple table with companies down the rows and PE, ROE, ROCE, debt to equity and net margin across the columns instantly shows the trade offs. The cheapest stock on PE might be the weakest on ROCE; the highest ROE might come with the scariest debt. Seeing all the ratios together is how you spot the balance between value, quality and safety that defines a sound investment idea.

The DuPont breakdown: connecting the ratios into one story

The DuPont analysis is a classic way to see how the ratios link together. It splits ROE into three drivers multiplied in a chain: net profit margin (profit divided by sales), asset turnover (sales divided by total assets) and the equity multiplier, which is total assets divided by equity and captures leverage. Written out, ROE equals net margin multiplied by asset turnover multiplied by the equity multiplier. The same headline ROE can be built very differently underneath.

Consider two companies that both show 20 percent ROE. The first earns it through a fat net margin and modest leverage, the mark of a strong brand with pricing power. The second earns the same 20 percent through a thin margin but very high leverage, the mark of a business that is borrowing heavily to lift the headline. The DuPont breakdown exposes the difference instantly. The first company's ROE is high quality and durable; the second company's ROE is fragile and will crack if interest rates rise or sales wobble.

This is why an experienced analyst rarely stops at the surface number. When ROE rises, DuPont asks whether margin improved (good), whether the company sweated its assets harder (good), or whether it simply took on more debt (risky). A premium FMCG or paints company tends to score on margin, a high volume retailer on asset turnover, and an over geared infrastructure firm on the equity multiplier. The quality of the same 20 percent could not be more different across those three.

You do not need to memorise the formula to use the idea. Just train yourself to ask, every time a profitability ratio looks impressive, where is this coming from? Margin, efficiency or leverage? That one question, applied consistently, separates investors who understand a business from those who are dazzled by a single attractive number.

Red flags: what the ratios reveal when you read them together

Individual ratios whisper; combinations shout. A high PE on its own is just an opinion about growth. A high PE combined with falling EPS, rising debt to equity and shrinking margins is a loud warning that the market's optimism is colliding with a deteriorating business. Learning to read these clusters is where ratio analysis becomes genuinely protective of your capital.

Watch for profit that grows while operating cash flow does not. If reported net profit keeps rising but the cash flow statement shows weak or negative operating cash, the earnings may be propped up by aggressive accounting or by sales booked to customers who have not paid. Receivables (money owed by customers) growing much faster than sales is a related red flag, hinting that the company is shipping goods on generous credit just to show growth.

Track debt to equity and interest coverage together over time. Slowly rising debt with steadily falling interest coverage is the classic path into distress, even when current profits still look acceptable. Add a falling ROCE that is sliding toward the cost of capital, and you have a business that is borrowing more to earn less on each rupee, the opposite of what you want to own. None of these signals is a certainty of trouble, but several appearing together justify serious caution.

On the brighter side, the same toolkit highlights quality. A company with steadily high ROCE, stable or rising margins, low and well covered debt, healthy operating cash flow and EPS that compounds year after year is showing every quantitative sign of a strong business. Ratios cannot promise the future, but a clean, consistent profile across all of them sharply tilts the odds in your favour over the long run.

Limitations of financial ratios: what the numbers cannot tell you

For all their power, financial ratios have real limits, and respecting those limits is part of using them well. First, they are built on accounting numbers, and accounting allows choices. Two honest companies can report different profits for identical underlying performance because they depreciate assets, value inventory or recognise revenue using different but legal methods. Always read the notes to the accounts, because the headline ratio sits on top of those choices.

Second, ratios are backward looking. They summarise what already happened, while the share price is a bet on what will happen next. A company can post a brilliant set of ratios for a year that is about to end, just as a turnaround can show ugly ratios right before it improves. One time events, such as the sale of a division or a large write off, can distort a single year's profit and throw every profitability and valuation ratio out of shape until you strip the one off item out.

Third, ratios cannot capture the qualitative side of a business. They will not tell you whether management is honest and capable, whether the moat is widening or eroding, whether a regulator is about to change the rules, or whether a new technology threatens the entire industry. A cyclical company can look cheapest on PE exactly at the top of its cycle, when earnings are unsustainably high, and most expensive at the bottom, when earnings are temporarily crushed. Numbers without judgement can lead you precisely the wrong way.

Fourth, ratios can be gamed and must be compared fairly. Leverage can flatter ROE, EBITDA can flatter margins, and selective use of standalone versus consolidated figures can flatter almost anything. Comparing companies on different financial year ends, different accounting standards or different definitions of debt quietly corrupts your conclusions. Treat ratios as powerful clues that must be cross checked, never as final verdicts. The right mindset is that of a careful detective, not a calculator.

Putting financial ratios to work in your own process

A practical way to start is to build a simple one page checklist for any company you study. Valuation: what are the PE, PB and dividend yield, and how do they sit against peers and the company's own ten year range? Profitability: are ROE and ROCE high and stable, and comfortably above the cost of capital? Safety: is debt to equity reasonable for the sector, is interest coverage strong, and is the current ratio healthy? Running every idea through the same questions keeps your analysis honest and comparable.

Then read the ratios as a connected story rather than a scorecard. Ask why a number is what it is, use the DuPont lens to see where returns come from, and always confirm that reported profit is backed by real operating cash flow. Combine the fundamental picture with what the chart is telling you about price and timing. A wonderful business bought at a wildly high valuation can still be a poor investment, and the ratios are what keep your enthusiasm anchored to a sensible price.

The best part is that you can practise all of this with zero financial risk. On First Plan India you can open the financials of companies such as Reliance, HDFC Bank, TCS or ITC, compute these ratios for yourself, and then paper trade the conclusions you draw, watching how the market actually responds over the following weeks. That feedback loop, study the ratios, form a view, test it with virtual money, review the result, is how the concepts in this guide turn into real skill.

Remember that everything here is educational material meant to build your understanding of fundamental analysis, not a recommendation to buy or sell any particular security. Markets carry risk, ratios can mislead, and past performance never guarantees the future. Use these tools to ask better questions, compare companies fairly within their sectors, and make decisions you can explain to yourself. That discipline, more than any single ratio, is what separates investing from guessing.

Frequently asked questions

What is a good PE ratio for Indian stocks?

There is no universal good PE, because the right level depends entirely on the sector and the company's growth. Fast growing IT and consumer companies on the NSE often trade at a PE of 30 to 50 and can still be fair, while cyclical metal or commodity firms may sit at 8 to 12. The useful test is to compare a stock's PE with its direct peers and with its own historical range, not against a single fixed number.

What is the difference between ROE and ROCE?

ROE (return on equity) measures profit as a percentage of shareholders' money only, while ROCE (return on capital employed) measures operating profit as a percentage of all long term capital, both equity and debt. Because ROE can be inflated by borrowing, ROCE gives a cleaner, leverage neutral picture of how good the underlying business really is. When both are high and close together, the company is profitable without relying on heavy debt.

What does the debt to equity ratio tell you?

Debt to equity shows how much of a company is funded by lenders versus owners, calculated as total borrowings divided by shareholders' equity. A figure of 0.5 means ₹0.50 of debt for every ₹1 of equity, which is conservative, while 2 or more is aggressive and riskier in a downturn. Read it alongside interest coverage, and always judge it against the sector, since banks and infrastructure firms naturally carry more debt than IT companies.

Which financial ratios are most important for beginners?

Start with five: EPS and PE for valuation, ROE and ROCE for profitability, and debt to equity for safety. EPS shows the profit per share, PE shows what you pay for it, ROE and ROCE show how well capital is used, and debt to equity shows balance sheet risk. Once these feel natural, add margins, the current ratio and price to book for a fuller view.

Can you compare PE ratios across different sectors?

No, comparing PE across sectors is one of the most common beginner mistakes. A software exporter and a steel producer have completely different growth, capital needs and risk, so their PE levels are not comparable. Always compare a company's PE only with other companies in the same sector and with its own past, otherwise a high quality business will look expensive and a struggling one will look cheap.

What is a good current ratio?

For most manufacturing and trading companies, a current ratio between 1.5 and 2 is comfortable, meaning current assets are 1.5 to 2 times current liabilities. Below 1 can signal a possible cash crunch, while a very high ratio above 4 may mean cash or inventory is sitting idle. Check the quick ratio too, which removes inventory, and compare against the company's sector since retailers and software firms differ naturally.

Where can I find financial ratios for Indian companies?

Listed companies publish quarterly and annual results that are available on the NSE and BSE websites and in each company's annual report, and SEBI rules require these to be public. From those statements you can calculate every ratio in this guide yourself. On First Plan India you can also open a company's financials, study its ratios and paper trade your conclusions with virtual money before risking anything real.

Are financial ratios enough to pick stocks on their own?

No, ratios are powerful clues but not a complete answer. They are backward looking, can be distorted by accounting choices and one time events, and cannot judge management quality, competitive moats or industry shifts. Use them to compare companies fairly within a sector and to spot red flags, then combine that with qualitative judgement and your own risk tolerance. This is education for analysis, not financial advice.