The Most Important Financial Ratios

What this unit covers

Learn to calculate and interpret the few ratios, like P/E and ROE, that matter most when judging a company, using a worked example.

By the end you will be able to

• Explain what question a ratio like P/E or ROE is answering.
• Calculate P/E and ROE from given figures.
• Judge a ratio only by comparing it to a peer, benchmark, or history.

How it starts: Two Companies, One Number

1. You are choosing between two company shares to buy.
2. Company A costs 20 rupees for every rupee it earns, Company B only 10.
3. Which company is the better buy?

Words you will meet

P/E Ratio

Share price divided by earnings per share, showing what you pay for each rupee of current profit.

ROE

Net profit divided by shareholder's equity, showing how well a company turns owner money into profit.

EPS

A company's profit divided across all its shares, giving profit per single share.

Shareholder's Equity

The money shareholders have put into and left inside the business.

In this module: Measuring Business Performance

1. The Most Important Financial Ratios (this unit)
2. Profitability & Efficiency
3. Debt, Cash & Financial Health
4. Red Flags Every Investor Should Know