Key Ratios

The P/E ratio shows how much investors are willing to pay for $1 of earnings.

P/E = Market Capitalisation ÷ Net Earnings
or
P/E = Share Price ÷ Earnings per Share (EPS)

For example, a P/E of 20 means investors are paying 20 times current earnings to own the stock.

• Historically, P/E ratios have averaged between 14 and 16.

• A low P/E may indicate the stock is undervalued, or that the market has concerns about the company.

• A high P/E might signal growth expectations or a premium paid for reliability and safety.

The Book Value is calculated as:

Total Assets – Total Liabilities – Intangible Assets

This ratio tells us how much investors are willing to pay for $1 of net tangible assets.

• A lower P/B ratio is generally better.

• A P/B ratio under 1 can suggest the company is undervalued, as the market is pricing it below its net asset value.

The P/S ratio shows how much investors are willing to pay for every dollar of a company’s sales.

P/S = Market Capitalisation ÷ Total Sales (Revenue)
or
P/S = Share Price ÷ Sales per Share

This ratio is especially useful for evaluating companies with low or negative earnings, where P/E may be misleading.

• A low P/S might suggest the company is undervalued relative to its revenue.

• A high P/S may indicate growth expectations, or a business with high margins and strong pricing power.

Enterprise Value (EV) is not a ratio itself but a core valuation measure used in several key financial ratios.

It represents a more complete picture of a company’s total value than market capitalisation alone.

EV = Market Capitalisation + Total Debt – Cash and Cash Equivalents

This measure estimates the theoretical cost to acquire a company.

If you were to buy every share:

• You’d take on the company’s debt (a liability),

• But also gain access to its cash holdings, which offset part of the cost.

Enterprise Value is commonly used in ratios like EV/EBITDA and EV/FCF to assess valuation more comprehensively.

Enterprise Value to Revenue (EV/Revenue) measures how much investors are valuing the company relative to its total revenue.

EV/Revenue = Enterprise Value ÷ Revenue

This ratio shows how effectively a company is using its resources to generate sales. It’s especially useful for analysing companies that are not yet profitable.

• A ratio between 1 and 3 is often considered reasonable.

• A higher ratio may indicate overvaluation.

• A lower ratio might suggest the company is undervalued.

Enterprise Value to EBITDA (EV/EBITDA) compares the total value of a company to its earnings before interest, taxes, depreciation, and amortisation.

EV/EBITDA = Enterprise Value ÷ EBITDA

This ratio reflects how much investors are willing to pay for a company relative to its core earnings.

• Useful for cross-country comparisons, as it excludes taxes.

• A low EV/EBITDA compared to peers may suggest undervaluation.

• A high EV/EBITDA could imply overvaluation or strong expected growth.

Revenue Growth is the percentage increase (or decrease) in a company’s revenue over a given time period.

Revenue Growth = ((Current Period Revenue – Previous Period Revenue) ÷ Previous Period Revenue) × 100

A healthy business should grow its revenue steadily over time:

• Growth helps keep pace with inflation.

• It reflects the company’s ability to reinvest profits effectively.

• Declining revenue over time may signal trouble, as it can lead to shrinking profits and long-term unprofitability.

Current Ratio measures a company’s ability to meet its short-term liabilities using its short-term assets.

Current Ratio = Current Assets ÷ Current Liabilities

This liquidity ratio helps assess whether the business can pay off obligations due within one year:

• A ratio below 1 may indicate liquidity problems.

• A ratio around 2 is often considered healthy.

• However, interpretation depends on the industry, as capital needs and operating cycles vary.

A low current ratio may signal financial distress, while an excessively high ratio could suggest underutilised resources.

Debt-to-Equity Ratio indicates the proportion of a company’s funding that comes from debt versus shareholder equity.

Debt-to-Equity Ratio = Total Debt ÷ Total Equity

This gearing ratio helps assess financial risk:

• A higher ratio suggests greater reliance on borrowed funds.

• Debt can be useful for funding growth or operations, but it also introduces interest obligations.

• In downturns or rising interest environments, heavy debt can erode profits and threaten sustainability.

As a rule of thumb, a D/E ratio above 2 is considered high and may indicate elevated financial risk, especially if it exceeds peers in the same industry.

Return on Invested Capital (ROIC) measures how efficiently a company generates returns from its capital base.

ROIC = NOPAT ÷ (Equity + Debt – Cash and Equivalents)
where NOPAT = Operating Income × (1 – Tax Rate)

This metric reflects the company’s ability to turn invested capital into profit:

• A higher ROIC indicates effective capital deployment.

• It is particularly useful for comparing profitability across companies with different capital structures.

• What counts as a “good” ROIC varies by industry, but consistent outperformance of the company’s cost of capital is a positive sign.

Return on Equity (ROE) shows how effectively a company is generating profit from shareholders’ equity.

ROE = Net Income ÷ Equity

It is essentially a return on the company’s net assets, indicating how much profit is generated per dollar of equity invested.

• ROE helps investors assess management efficiency in using equity capital.

• A higher ROE generally reflects better financial performance.

• However, it should be considered in context — including the risk-free rate, inflation, and the company’s risk premium.

• ROE should also be benchmarked against industry peers, as expectations vary by sector.

Dividend Yield indicates the cash return an investor receives in the form of dividends for owning a share in the company.

Dividend Yield = Dividend per Share ÷ Price per Share

• It reflects the income component of an investment’s return.

• Established and slower-growing companies often pay higher dividends, as they have fewer reinvestment opportunities.

• A high yield can seem attractive but may also be a warning sign:

  • The dividend may not be sustainable, especially if it’s funded through debt.

  • The stock price may be depressed due to concerns like high debt, declining market share, or legal issues.

• Therefore, always analyse the underlying fundamentals rather than assuming a high yield is a good opportunity.

Dividend Growth Rate is the annualised rate at which a company increases its dividend payments over time.

• A rising dividend growth rate typically signals a profitable and well-managed company—provided those dividends are funded from actual earnings, not debt.

• Income investors favour companies with a steady dividend growth record, as it provides more predictable and rising income.

• This metric is also a key input in valuation models such as the Gordon Growth Model, where future dividends are projected based on past growth.

To assess sustainability, always compare with the Dividend Coverage Ratio.

Dividend Coverage Ratio measures how many times a company’s net income can cover its dividend payments.

It is calculated as:

  Net Income ÷ Dividends Paid

• A value greater than 2 is generally considered strong.

• A ratio consistently below 1.4 may indicate that dividends are unsustainable and under pressure.

The inverse of this ratio is the Payout Ratio:

  Dividends Paid ÷ Net Income

• This tells you what percentage of income is paid out to shareholders.

• A Payout Ratio under 50% is often considered safe.

• A Payout Ratio over 70% may signal limited room for reinvestment or potential dividend cuts in the future.