The 6 Financial Ratios That Actually Matter (India): Stop Over-Analyzing Stocks
Stop analyzing 100+ ratios. These 6 essential financial ratios help Indian investors judge business quality, valuation, and safety—without confusion.
Short Answer (TL;DR)
Indian stock investors only need 6 financial ratios to make informed decisions:
ROCE – Business quality
ROE (with Debt) – Shareholder returns
Cash Flow Conversion – Profit truth check
PEG Ratio – Growth-adjusted valuation
Price-to-Book – Valuation for banks & NBFCs
Interest Coverage – Debt survival
Together, these ratios answer three questions that actually matter:
Is the business good? Is the stock reasonably priced? Will the company survive?
Everything else is noise.
Why Most Investors Get Stuck
Open any Indian stock screener—and you’ll see 100+ ratios:
Current Ratio
Quick Ratio
Asset Turnover
EV/EBITDA
Inventory Days
This leads to analysis paralysis.
As a retail investor, you don’t need 100 ratios.
You need the Vital Few—the ones that separate:
Compounders from Wealth Destroyers
In our previous guide on Cash Flow, we learned how to check if profits are real.
Now, we go one level deeper.
Part 1: Quality Ratios
Is this a good business?
Before asking “Is this stock cheap?”, ask:
“Is this business even worth owning?”
1️⃣ ROCE – Return on Capital Employed
The King of Ratios
If you track only one ratio for non-financial companies, make it ROCE.
What it asks:
For every ₹100 invested in the business (Equity + Debt), how much profit is generated?
Why it matters:
This is pure business logic.
If a company borrows at 10% but earns only 8% ROCE, it is destroying value—even if profits look fine.
Benchmarks (India):
> 20% → Excellent (moat / pricing power)
10–20% → Average
< 10% → Avoid (inefficient business)
Investor Insight:
Rising ROCE is a classic multi-bagger signal.
A move from 15% → 25% ROCE often precedes major stock rerating.
2️⃣ ROE – Return on Equity
The Shareholder’s View (with a trap)
What it asks:
For every ₹100 of shareholder money, how much profit is generated?
The Trap:
ROE can be artificially boosted using debt.
Example:
Equity: ₹10
Debt: ₹90
Profit: ₹5
ROE = 50% (looks amazing)
Reality = high bankruptcy risk
Golden Rule:
Never look at ROE alone
High ROE + Low Debt = Gold Standard
Always check Debt-to-Equity alongside ROE.
Part 2: The Truth Ratio
Are the profits real?
3️⃣ Cash Flow Conversion (CFO / EBITDA)
The Lie Detector
This is one of the most underrated ratios in Indian markets.
What it asks:
“You say you made ₹100 in profit—how much actually came into the bank?”
Why it matters (India-specific):
Sales can be booked easily
Cash collection cannot be faked easily
Benchmarks:
> 70% → Healthy, real profits
50–70% → Monitor closely
< 50% → Red flag
Hard Rule:
If EBITDA is rising but cash conversion is falling, something is wrong.
That’s how accounting problems show up before headlines.
Part 3: Valuation Ratios
Is the stock cheap or expensive?
A great business at a bad price is a bad investment.
4️⃣ PEG Ratio – Price with Growth Context
PE Ratio alone is misleading.
PE 50 isn’t expensive if growth is 40%
PE 10 isn’t cheap if profits are shrinking
PEG = PE / Earnings Growth Rate
Peter Lynch Rule:
PEG < 1 → Undervalued
PEG ≈ 1 → Fair
PEG > 2 → Expensive
Indian Reality:
In bull markets, finding PEG < 1 is rare.
For quality growth stocks, PEG < 1.5 is often reasonable.
5️⃣ Price-to-Book (P/B)
Only for Banks, NBFCs & Insurance
Important:
Do not use P/B for manufacturing or FMCG companies.
Why it works for banks:
For banks, Book Value = Cash + Loans (real assets).
Benchmarks:
P/B < 1 → Undervalued or bad asset quality
P/B 1–2.5 → Reasonable
P/B 3–4 → Premium (e.g., HDFC Bank historically)
Strategy:
When a strong bank trades near historical low P/B, it’s often an opportunity—not a risk.
Part 4: Survival Ratios
Will the company go bust?
6️⃣ Interest Coverage Ratio (ICR)
Debt Survival Check
What it asks:
How many times can the company pay interest using operating profit?
Danger Zones:
ICR < 1.5 → Critical
ICR < 1 → Borrowing to pay interest (Ponzi behaviour)
ICR > 3 → Safe
ICR > 10 → Fortress balance sheet
Rule:
Avoid companies with ICR < 1—no turnaround story is worth that risk.
Bonus: The Indian Governance Check
Promoter Share Pledging
This isn’t a ratio—but in India, it’s non-negotiable.
What it is:
Shares pledged by promoters to raise personal loans.
Rules of Thumb:
0% → Ideal
> 25% → Red flag
> 50% → Uninvestable
Risk:
If prices fall, lenders dump shares → crash
(Examples: Zee, Coffee Day)
Summary Cheat Sheet
Frequently Asked Questions
Q: What is the most important financial ratio for Indian stocks?
ROCE is the most important ratio for non-financial companies because it measures true business efficiency.
Q: Is ROCE better than ROE?
Yes. ROCE includes debt and is harder to manipulate, making it a better quality indicator.
Q: Which ratio detects fake profits?
Cash Flow Conversion (CFO/EBITDA) is the best indicator of inflated profits in Indian companies.
Final Thought: Context Is King
Ratios are tools—not rules.
Power companies like NTPC will always have lower ROCE
FMCG companies like Nestlé will always trade at high PE
Use:
Cash Flow to verify truth
Ratios to judge quality, valuation, and survival
That’s how conviction is built.
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