Analysing a Company: Key FA Ratios
PE, ROE, ROCE, D/E, EPS growth — the six numbers every long-term investor must know.
Six ratios — what each one measures
1. PE Ratio — how expensive is the stock?
PE = Market Price ÷ Earnings Per Share (EPS). A PE of 25 means you're paying ₹25 for every ₹1 of annual profit the company earns.
Normally Pidilite trades at 55–70× because of its dominant brand (Fevicol). At 46×, it was cheap relative to its own history — a signal that FA investors used to identify the buying opportunity. By December 2021 it had recovered to ₹2,850.
Key lesson: PE is most useful relative to the company's own historical range and its sector peers — not as an absolute number.
2. ROE — is the company using your money well?
ROE = Net Profit ÷ Shareholder Equity × 100. If ROE is 20%, the company earned ₹20 for every ₹100 of equity shareholders' money. A consistent ROE above 15% over 5+ years is a hallmark of a quality business.
| Company | FY2023 ROE | What it signals |
|---|---|---|
| Asian Paints (ASIANPAINT) | ~29% | Strong brand moat, pricing power |
| TCS (TCS) | ~46% | Capital-light IT model — very efficient |
| A typical PSU bank | 5–8% | Low quality; eroding shareholder value |
| Zomato (early years) | Negative | Loss-making — ROE not meaningful yet |
Note: high ROE from high leverage is a warning sign. Check D/E together with ROE.
3. ROCE — does the whole business earn above the cost of borrowing?
ROCE = EBIT ÷ (Equity + Debt) × 100. Unlike ROE, ROCE includes debt in the denominator, so it tells you whether the company earns more than it costs to fund the business — debt included.
A company with ROCE consistently above 20% is generating real economic value. If ROCE < cost of debt (~10–12% for Indian companies), the business is actually destroying value even if it shows a profit.
4. D/E Ratio — how much is borrowed?
D/E = Total Debt ÷ Total Equity. A D/E of 0.3 means for every ₹100 of equity, the company has ₹30 of debt. Lower is safer for non-financial companies.
For retail investors screening for quality: prefer D/E below 0.5 for manufacturing/FMCG, below 1.0 for capital-goods companies. Banks and NBFCs are exceptions — their business model is to borrow and lend.
5. EPS Growth — is profit actually increasing?
EPS = Net Profit ÷ Total Shares Outstanding. EPS growth year-on-year tells you whether the business is actually expanding its earnings.
Example: Cummins India (CUMMINSIND) EPS trend (historical illustration)
Consistent 3–5 year EPS growth above 15% is one of the strongest signals of a durable business. One good year is noise. Five good years is a pattern.
6. OPM — how efficient is the core business?
OPM = Operating Profit ÷ Net Revenue × 100. Operating profit excludes interest costs, taxes and extraordinary items — it measures how much the core business retains from every rupee of sales.
FMCG companies like Marico or Colgate typically show OPM 15–25%. IT companies like Infosys show 20–25%. Infrastructure companies often show 8–12%. Compare within the same sector — a lower OPM than sector peers signals a cost disadvantage.
Putting it together: a quick FA screen
Before buying a stock for long-term holding, run this 5-minute check using Screener.in or any financial data site:
| Check | Good sign | Warning sign |
|---|---|---|
| PE vs 5yr avg PE | Trading below its own history | Trading at 2× its history |
| ROE (5yr median) | > 15% consistently | Declining or erratic |
| ROCE | > 20%, steady | < cost of debt |
| D/E ratio | < 0.5 (non-financials) | > 1.5 and rising |
| EPS (last 5 years) | Growing every year | Flat or falling |
| OPM trend | Stable or expanding | Compressing year after year |
- PE ratio shows how much you pay for ₹1 of earnings — compare it to the company's own historical range, not an absolute number.
- ROE above 15% consistently means the company is creating value from shareholders' money. Check D/E alongside it.
- ROCE above 20% means the entire business (including debt) earns more than it costs to fund.
- D/E below 0.5 is the safety benchmark for non-financial companies. Rising D/E in a downturn is a serious warning.
- EPS growth over 3–5 consecutive years is more meaningful than any single year's number.
- OPM trending upward means the business is becoming more efficient — a rare and valuable quality.