Importance of Figures, Numbers, & Ratios to Check Before Buying Stocks

Understanding a stock goes beyond its price. Investors must analyse certain financial figures, performance metrics, and ratios to make informed decisions. These numbers reflect the company’s operational health, growth prospects, and valuation. For those starting their journey in stock investing, grasping the meaning and use of these indicators is essential before selecting a stock for investment.

Ratios and figures serve as tools to interpret a company’s performance.

Financial ratios and numerical indicators simplify complex financial statements. They help compare companies within the same sector, identify trends over time, and assess management efficiency, profitability, liquidity, and valuation.

Before diving into ratios, it’s essential to understand standalone figures that influence stock selection.

Revenue

Also known as the top line, revenue shows how much money a company generates from its core operations. Consistent revenue growth signals increasing market demand and business expansion.

Net Profit

This is the bottom line—what the company earns after deducting all expenses, taxes, and interest. It represents profitability and is a key indicator of financial health.

Earnings Per Share (EPS)

EPS is calculated as:

• EPS = Net Profit ÷ Number of Outstanding Shares

A rising EPS trend often reflects growing shareholder value.

Market Capitalisation

This figure represents the total value of a company’s outstanding shares:

• Market Cap = Share Price × Total Number of Shares

It helps classify companies into large-cap, mid-cap, or small-cap segments, each with distinct risk-return profiles.

Ratios give context to the raw numbers and help evaluate whether a stock is undervalued, overvalued, or fairly priced.

Price-to-Earnings (P/E) Ratio

Indicates how much investors are willing to pay for ₹1 of earnings:

• P/E Ratio = Share Price ÷ Earnings Per Share

A high P/E may suggest overvaluation or high growth expectations, while a low P/E could indicate undervaluation or limited growth prospects.

Price-to-Book (P/B) Ratio

Compares market value to book value (net assets):

• P/B Ratio = Share Price ÷ Book Value Per Share

Often used for banks and asset-heavy industries.

Debt-to-Equity (D/E) Ratio

Shows the proportion of borrowed capital to shareholder funds:

• D/E Ratio = Total Liabilities ÷ Shareholder’s Equity

A lower D/E ratio implies stronger financial stability.

Return on Equity (ROE)

Measures how efficiently the company uses shareholder funds to generate profit:

• ROE = Net Income ÷ Shareholder’s Equity × 100

Higher ROE reflects better management performance.

Dividend Yield

Reflects the return from dividends relative to the share price:

• Dividend Yield = (Annual Dividend per Share ÷ Share Price) × 100

Helpful for income-seeking investors.

For a more nuanced understanding, consider these metrics:

Current Ratio

Assesses liquidity by comparing current assets and liabilities:

• Current Ratio = Current Assets ÷ Current Liabilities

A ratio above 1 indicates the company can meet short-term obligations.

PEG Ratio (Price/Earnings to Growth)

Accounts for growth when evaluating P/E ratio:

• PEG Ratio = P/E Ratio ÷ Annual EPS Growth Rate

A PEG near 1 is considered balanced.

Numbers are just a part of the story—context is crucial.

• Sector comparison: A “high” P/E in one sector may be normal in another.
  

• Historical context: Compare a company's ratios over the last few years.
  

• Economic cycles: During booms, valuations may look inflated; in downturns, they might appear attractive.
  

Understanding industry norms and macro conditions is necessary for accurate interpretation.

Misreading financial ratios can lead to poor investment decisions.

• Relying on a single ratio without cross-verification
  

• Ignoring qualitative aspects like management quality and business model
  

• Overlooking temporary events affecting financials, such as one-time gains or losses
  

Comprehensive evaluation includes financial, strategic, and sectoral analysis.

Stock screeners on brokerage and financial websites allow users to filter stocks using ratios and figures.

Example: You can screen for stocks with:

• P/E ratio below sector average
  

• ROE above 15%
  

• D/E ratio under 0.5
  

This method can shortlist fundamentally sound stocks quickly.

Numbers and ratios act as a lens through which investors can evaluate a company’s fundamentals. While no single metric guarantees success, a combination of figures—when read in context—can significantly improve the quality of stock selection. Whether you are a new investor or refining your approach, focusing on these core indicators will help you make more informed and rational decisions.

This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.