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Financial Ratios Explained

The document explains key financial ratios used to assess a company's performance, including ROE, ROCE, RONW, P/B Ratio, EPS, and P/E Ratio. Each ratio has a specific formula and ideal benchmarks to determine financial health and valuation. These metrics are essential for evaluating profitability and investment potential in stocks.

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Choudhary Rajpal
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19 views2 pages

Financial Ratios Explained

The document explains key financial ratios used to assess a company's performance, including ROE, ROCE, RONW, P/B Ratio, EPS, and P/E Ratio. Each ratio has a specific formula and ideal benchmarks to determine financial health and valuation. These metrics are essential for evaluating profitability and investment potential in stocks.

Uploaded by

Choudhary Rajpal
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

Stock & Financial Ratio Explanation

1. ROE (Return on Equity):

- Measures how much profit a company generates with the money from shareholders.

- Formula: ROE = (Net Profit / Shareholder's Equity) x 100

- Ideal: > 15% is excellent.

2. ROCE (Return on Capital Employed):

- Measures the return on all capital employed (debt + equity).

- Formula: ROCE = (EBIT / Capital Employed) x 100

- Ideal: > 15% is considered strong.

3. RONW (Return on Net Worth):

- Very similar to ROE. Indicates return on shareholder's net worth.

- Formula: RONW = (Net Profit / Net Worth) x 100

4. Price to Book Value (P/B Ratio):

- Measures market value vs. book value.

- Formula: P/B Ratio = Share Price / Book Value per Share

- <1 = undervalued, >3 = overvalued (depends on sector)

5. EPS (Earnings Per Share):

- Profit earned per share.

- Formula: EPS = Net Profit / No. of Equity Shares

- Higher EPS indicates higher profitability.

6. P/E Ratio (Price to Earnings):


- Indicates how much the market is willing to pay per Rs.1 of earnings.

- Formula: P/E = Share Price / EPS

- <10 = undervalued, 10-20 = fair, >25 = high expectation

P/E + EPS Combination:

- High EPS + Low P/E -> Undervalued

- High EPS + High P/E -> Growth stock

- Low EPS + High P/E -> Risky / Overvalued

These ratios help in analyzing a stock's financial health, valuation and profitability.

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