Ratios to look out for while investing in a stock

Stock market success hinges on mastering a handful of key financial ratios that reveal a company's profitability, valuation, and stability amid market noise.

Price-to-Earnings (P/E) Ratio

The P/E ratio divides a stock's current price by its earnings per share, indicating how much investors pay for each rupee of profit. Low P/E values below 15 often highlight undervalued stocks in mature sectors like FMCG or banking, while ratios above 25 signal growth potential in tech or pharma but carry higher risk if earnings stall. Always compare against industry peers and historical trends to avoid value traps disguised as bargains.

Earnings Per Share (EPS) and PEG Ratio

EPS tracks net profit per outstanding share, with steady 15-20% yearly growth marking reliable wealth creators over 5-10 years. The PEG ratio sharpens this by dividing P/E by projected EPS growth rate—a PEG under 1 flags stocks delivering expansion at a reasonable price, ideal for blending value and momentum strategies without overpaying for hype.

Return on Equity (ROE)

ROE measures net income against shareholders' equity, showing management efficiency in generating returns—aim for consistent 18%+ in low-debt firms with durable moats like branded consumer goods. Rising ROE over quarters points to compounding power, but probe for debt-fueled spikes that crumble in downturns.

Debt-to-Equity (D/E) Ratio

D/E pits total liabilities against equity to gauge leverage risk—ratios under 0.5 suit cyclical plays like autos, ensuring resilience during economic dips. Higher ratios work for cash-rich sectors like telecom, but excessive debt amplifies losses, so pair with interest coverage for a fuller risk picture.

Price-to-Book (P/B) and Dividend Yield

P/B compares market price to net assets per share; sub-1.5 levels scream undervaluation in capital-intensive areas like metals or realty. Dividend yield, annual payout divided by price, targets 3-5% from steady giants for passive income that beats fixed deposits, fueling reinvestment without principal erosion.