Hey Investor – Are You Buying Blind or Smart?
When I first started investing, I had no idea what a PE ratio was — forget understanding complex balance sheets! But over time, I realized one truth: Numbers don’t lie. If you want to invest like Warren Buffett or even just avoid rookie mistakes, you have to learn a few financial ratios.
So in this blog, let’s break down the top 5 financial ratios every stock investor should know, how they work in the Indian stock market, and how I personally use them before buying any stock.
Top 5 Financial Ratios You Must Know (With Table)
Here’s a quick snapshot before we dive deep:
| Financial Ratio | What It Tells You | Ideal Range (Generally) |
| P/E Ratio | Valuation – Is it overpriced? | 10–25 (depends on industry) |
| P/B Ratio | Asset value vs stock price | < 3 is usually good |
| ROE (Return on Equity) | How well a company uses shareholders’ money | >15% is excellent |
| Debt-to-Equity Ratio | Company’s financial risk | < 1 is safer |
| Current Ratio | Short-term liquidity (can it pay bills?) | 1.5–2 is ideal |
1. Price to Earnings (P/E) Ratio – “Is It Worth the Price?”
Formula:
P/E = Current Share Price / Earnings Per Share (EPS)
Why I care:
Whenever I look at a stock, the first question I ask is – Am I overpaying? The PE ratio gives me a direct answer. A high PE ratio might mean the stock is overpriced, or it could signal high growth potential.
💡 Warren Buffett’s Tip:
He prefers companies with consistent earnings and a fair PE, not too high.
🤔 What’s a Good PE Ratio?
In India, a PE between 10–25 is usually considered fair. But don’t generalize! A tech stock may have 40+ PE and still grow fast, while a PSU might stay at 6-8.
2. Price to Book (P/B) Ratio – “How Much Are the Assets Worth?”
Formula:
P/B = Stock Price / Book Value Per Share
My take:
P/B ratio helps you see if you’re paying more than the company’s actual net asset value. It’s especially useful in sectors like banking or real estate.
What I look for:
P/B less than 3 is a green flag, but value traps can exist — always check return on assets too.
3. Return on Equity (ROE) – “How Smartly Are They Using Money?”
Formula:
ROE = Net Income / Shareholder’s Equity
How I use it:
ROE tells me if the management knows how to make money from money. It’s a simple measure of efficiency.
✅ A ROE above 15% consistently over 5 years is what I call a “champion stock”.
Pro Tip:
Always check if high ROE is boosted by too much debt (look at Debt-to-Equity next).
4. Debt-to-Equity Ratio – “How Risky Is This Business?”
Formula:
Debt-to-Equity = Total Debt / Shareholder’s Equity
Why this matters:
I love growth, but not with dangerous debt. A company can grow fast using loans, but that’s a ticking time bomb.
What’s safe:
For most sectors, less than 1 is good. In capital-heavy sectors like infra or power, a little higher can be okay — but watch closely.
5. Current Ratio – “Can They Pay Their Bills?”
Formula:
Current Ratio = Current Assets / Current Liabilities
Why I use it:
This ratio tells me if a company is liquid enough to pay its short-term obligations. During bad quarters, liquidity is survival.
What I look for:
A Current Ratio between 1.5–2 is ideal. Too low means risk; too high could mean inefficient asset use.
Warren Buffett’s Favorite 5 Financial Ratios
Buffett doesn’t rely on 100+ complex metrics. He’s known to focus on:
- ROE
- Consistent Earnings
- Low or manageable debt
- Good operating marg
- Long-term business moat
So yes, even if you’re in India, these apply.
Recommended YouTube Videos to Understand These 5 Financial Ratios
- 📺 Stock Market Basics – CA Rachana Phadke Ranade
- 📺 Warren Buffett’s Favorite Metrics – The Financial Diet
CTA – Ready to Analyze Like a Pro?
🎯 Use this free tool: 👉 Financial Ratio Analyzer for Indian Stocks (Free Tool)
📘 Want to learn more in-depth?
👉 Check out this best-selling books
- The Intelligent Investor
- The Warren Buffett Way
- Common Stocks and Uncommon Profits
- Business Adventures
- Where are the Customers’
- The Little Book of Common Sense Investing
Tools I Personally Use:
| Tool | Purpose | Link |
| Tickertape | In-depth financial analysis | Try Tickertape |
| Screener.in | Ratio screening for Indian stocks | Visit Screener |
| Moneycontrol Pro | Real-time data and insights | Join Pro |
FAQ – Financial Ratios You Need to Know
✅ 1. What is a good PE ratio for Indian stocks?
Answer: A good PE (Price-to-Earnings) ratio varies by industry. Generally, 15–25 is considered reasonable, but growth stocks may have higher PE. Compare it with sector averages for better insights.
✅ 2. Why is the debt-to-equity ratio important before investing?
Answer: It shows how much a company relies on debt. A high debt-to-equity ratio can be risky, especially in downturns. Ideally, it should be below 1 for stable companies.
✅ 3. How can I use the ROE ratio to pick good stocks?
Answer: Return on Equity (ROE) tells how efficiently a company generates profit from shareholders’ money. A consistent ROE above 15% is usually a positive sign.
✅ 4. Is a low current ratio always bad for a company?
Answer: Not always. A current ratio below 1 may indicate liquidity issues, but for some businesses with fast cash flow, it may not be a big concern. Context matters.
✅ 5. Which is better: ROE or ROCE?
Answer: ROE focuses on shareholders’ returns, while ROCE looks at returns from total capital (debt + equity). Use ROCE for companies with high debt; use both together for better analysis.
✅ 6. How do financial ratios help in long-term investing?
Answer: Financial ratios reveal a company’s health, profitability, debt levels, and efficiency. Long-term investors use them to filter out risky or overvalued stocks.
✅ 7. Can I trust ratios from stock apps or websites?
Answer: Mostly yes, if the data source is reliable (like Moneycontrol, Screener, or company filings). But it’s always better to cross-check or calculate key ratios manually.
✅ 8. How often should I check these ratios for a stock I hold?
Answer: Once every quarter is good practice, especially after earnings reports. Regular checks help you stay updated on any major changes in financial health.
✅ 9. Are these ratios useful for penny stocks or small-cap stocks?
Answer: Yes, but be cautious. Small caps can have volatile or inconsistent numbers. Combine ratios with qualitative research like management quality and market potential.
✅ 10. Can I invest just based on financial ratios?
Answer: No, you shouldn’t. Ratios are one part of the puzzle. Combine them with company analysis, industry trends, news, and technical charts for a complete picture.
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Final Thoughts – Be a Ratio Ninja, Not a Random Buyer!
If you’re investing real money, you deserve real insights. These 5 financial ratios aren’t just numbers — they are your filter against risky or overhyped stocks.
So next time, before you invest in a company just because someone on YouTube said it’s a “multibagger”, open the balance sheet, check these ratios, and trust your research.
This guide is for educational purposes. Always do your own due diligence before investing. For help with detailed portfolio planning, feel free to explore our services at MoneyMastersHQ.com
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