Level 4 · Module 2 · The Numbers
Financial Ratios That Matter
PE, ROE, ROCE, Debt-to-Equity, what each really asks, in plain English.
In this lesson
What you'll be able to do
- Compute the core ratios
- Interpret them in context
- Know each ratio's blind spot
Think about it
A stock trades at a PE of 8 while its peer trades at 45. Which is the better business?
Story
Let's picture it
You cannot tell from PE alone. A low PE can mean the market expects earnings to fall, a value trap. A high PE can mean the market expects rapid growth, which may or may not arrive. A ratio is a question, never an answer. Its whole value is in the comparison you make next.
Visual
What each ratio asks
P/E = Price ÷ EPS
How many years of current earnings am I paying for?
ROE = Net profit ÷ Equity
How well does it use shareholders' money?
ROCE = EBIT ÷ Capital employed
How well does it use all capital, debt included?
D/E = Debt ÷ Equity
How much of the business runs on borrowed money?
Current ratio
Can it pay its short-term bills?
Plain English
The simple explanation
Ratios are only meaningful in comparison: against the same company's history, against direct peers, and against the industry norm.
ROE can be flattered by heavy debt, which is exactly why ROCE, which counts all capital employed, is a useful companion.
Debt is not evil. Utilities and banks run on it structurally. What matters is whether cash flows comfortably cover interest.
Real world
Screening tools
Public screeners let you filter Indian listed companies by ROCE, D/E and growth in seconds. The skill isn't running the filter, it's knowing which number is meaningless for that industry.
Watch out
Common mistakes
- Comparing PE across different industries
- Using ROE alone on a debt-heavy company
- Trusting a single year instead of a five-year trend
Did you know?
Banks are analysed with different ratios entirely, NIM, NPA, CASA and capital adequacy, because deposits are their raw material, not their debt.
Your turn
Mini challenge
Pick two companies in the same sector. Put PE, ROE, ROCE and D/E side by side for five years. Write one sentence on the difference.
Quick quiz
1 / 3
Wrap up
Summary
Ratios ask sharp questions. Compare against history and peers, and always know each ratio's blind spot.
- PE = valuation, not quality
- ROCE complements ROE when debt exists
- Trends beat single-year snapshots
Revise