The Ultimate Guide to Stock Market Ratios (With Formulas & Examples).

Investing in the stock market isn’t just about buying and hoping for the best. To truly succeed, you need to analyze companies carefully. Financial ratios are one of the simplest yet most powerful tools to do this.

Ratios help you answer key questions:

• Is the company profitable?

• Is the stock undervalued or overvalued?

• Can the company pay its debts?

• Is it efficient in using assets?

This covers all the essential stock market ratios every investor should know — grouped into 5 categories for easy learning.

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🔹 1. Profitability Ratios – Measure Earnings Power

These ratios show how well a company is generating profit.

1. Earnings Per Share (EPS)

   $$EPS = \frac{Net Profit}{No. of Shares}$$

   👉 Shows profit earned per share. Higher EPS = better profits.

2. Net Profit Margin

   $$Net Profit Margin = \frac{Net Profit}{Revenue} \times 100$$

   👉 Measures how much of each rupee of revenue is left as profit.

3. Gross Profit Margin

   $$Gross Profit Margin = \frac{Gross Profit}{Revenue} \times 100$$

   👉 Focuses on profit after production costs.

4. Operating Margin

   $$Operating Margin = \frac{Operating Profit}{Revenue} \times 100$$

   👉 Shows profitability after operating expenses.

5. Return on Equity (ROE)

   $$ROE = \frac{Net Profit}{Shareholder’s Equity} \times 100$$

   👉 Indicates how efficiently shareholder money is used.

6. Return on Capital Employed (ROCE)

   $$ROCE = \frac{EBIT}{Capital Employed} \times 100$$

   👉 Measures efficiency of both debt & equity capital.

7. Return on Assets (ROA)

   $$ROA = \frac{Net Profit}{Total Assets} \times 100$$

   👉 Tells how well assets generate profit.

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🔹 2. Valuation Ratios – Tell If Stock Is Cheap or Expensive

These ratios help decide whether the stock price is justified.

1. Price-to-Earnings (P/E)

   $$P/E = \frac{Price}{EPS}$$

   👉 Higher P/E = costly stock, Lower P/E = cheaper stock.

2. Price-to-Book (P/B)

   $$P/B = \frac{Price}{Book Value per Share}$$

   👉 Useful for financial companies.

3. Price-to-Sales (P/S)

   $$P/S = \frac{Price}{Revenue per Share}$$

   👉 Good for companies with low profits but growing sales.

4. EV/EBITDA

   $$EV/EBITDA = \frac{Enterprise Value}{EBITDA}$$

   👉 Favored by analysts for valuation comparisons.

5. Dividend Yield

   $$Dividend Yield = \frac{Dividend}{Price} \times 100$$

   👉 Shows % return through dividends.

6. Earnings Yield

   $$Earnings Yield = \frac{EPS}{Price} \times 100$$

   👉 Inverse of P/E; useful for comparisons with bond yields.

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🔹 3. Liquidity Ratios – Short-Term Financial Health

These ratios show if a company can meet short-term obligations.

1. Current Ratio

   $$Current Ratio = \frac{Current Assets}{Current Liabilities}$$

   👉 Healthy if > 1.5.

2. Quick Ratio (Acid Test)

   $$Quick Ratio = \frac{Current Assets - Inventory}{Current Liabilities}$$

   👉 Stricter measure than current ratio.

3. Cash Ratio

   $$Cash Ratio = \frac{Cash}{Current Liabilities}$$

   👉 Pure liquidity check.

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🔹 4. Efficiency Ratios – Measure Asset Utilization

These ratios indicate how efficiently a company manages its assets.

1. Asset Turnover Ratio

   $$Asset Turnover = \frac{Revenue}{Total Assets}$$

2. Inventory Turnover

   $$Inventory Turnover = \frac{COGS}{Average Inventory}$$

   👉 Faster turnover = efficient operations.

3. Receivables Turnover

   $$Receivables Turnover = \frac{Revenue}{Accounts Receivable}$$

   👉 High ratio = customers pay quickly.

4. Payables Turnover

   $$Payables Turnover = \frac{Purchases}{Accounts Payable}$$

   👉 Shows how fast company pays suppliers.

5. Working Capital Turnover

   $$Working Capital Turnover = \frac{Revenue}{Working Capital}$$

   👉 Efficiency of using working capital.

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🔹 5. Leverage & Solvency Ratios – Long-Term Risk & Debt Management

These ratios assess financial risk.

1. Debt-to-Equity (D/E)

   $$D/E = \frac{Debt}{Equity}$$

   👉 Lower ratio = safer company.

2. Debt Ratio

   $$Debt Ratio = \frac{Debt}{Total Assets}$$

3. Interest Coverage Ratio

   $$ICR = \frac{EBIT}{Interest Expense}$$

   👉 Should be > 3 for safety.

4. Financial Leverage Ratio

   $$FLR = \frac{Total Assets}{Equity}$$

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Gowtham's Note:

These ratios give investors a 360° view of any company’s financial health.

• Profitability Ratios → Is the company making money?

• Valuation Ratios → Is the stock cheap or expensive?

• Liquidity Ratios → Can it pay short-term debts?

• Efficiency Ratios → Is it using resources well?

• Leverage Ratios → Is it overburdened with debt?

📌 Pro Tip: Never rely on a single ratio. Always look at multiple ratios, compare with peers, and track trends over time.