A. Ratios Used in Equity Analysis
Valuation Ratios (Used to Assess Stock Price Attractiveness)
1. Price-to-Earnings (P/E) Ratio
P/E Ratio = Closing Market Price of Share / Earnings per Share (EPS)
Measures how much investors pay for each dollar of earnings.
High P/E → Growth expectations; Low P/E → Potential undervaluation.
Forward P/E uses estimated future earnings.
2. Price-to-Book (P/B) Ratio
P/B Ratio = Closing Market Price of Share/ Book Value per Share
Compares market value to accounting book value.
P/B < 1 → Potentially undervalued.
3. Price-to-Sales (P/S) Ratio
P/S Ratio =Market Capitalization / Total Revenue
Useful for valuing companies with no earnings.
4. Enterprise Value-to-EBITDA
EV/EBITDA=Enterprise Value / EBITDA
Measures company value relative to operating earnings.
5. Dividend Yield
Dividend Yield=Annual Dividends per Share / Closing Market Price of Share
Shows return from dividends relative to stock price.
Profitability Ratios (Measure Earnings Performance)
6. Return on Equity (ROE)
ROE=Net Income / Shareholders’ Equity
Measures how efficiently equity is used to generate profits.
7. Return on Assets (ROA)
ROA=Net Income / Total Assets
Shows how efficiently assets generate profit. Evaluates asset utilization efficiency.
8. Gross Margin
Gross Margin= Gross Profit / Total Revenue
Indicates profitability after cost of production.
9. Net Profit Margin = Net Income / Total Revenue
Shows how much of each rupee of revenue generates profit.
10. Operating Margin
Operating Margin= Operating Income / Total Revenue
Measures profit from core operations.
11. Return on Invested Capital (ROIC)
ROIC= Net Operating Profit After Tax (NOPAT) /Invested Capital
NOPAT = EBIT × (1 – Tax Rate)
Invested Capital = Total Debt + Total Equity – Cash & Non-Operating Assets
Measures return on total capital (debt + equity).
Liquidity Ratios (Assess Short-Term Financial Health)
12. Current Ratio
Current Ratio = Current Assets / Current Liabilities
Tests ability to pay short-term obligations.
CR > 1.5 is generally safe; CR < 1 may signal liquidity issues.
13. Quick Ratio (Acid-Test Ratio)
Quick Ratio = (Current Assets – Inventory) / Current Liabilities
More stringent liquidity measure excluding inventory.
14. Cash Ratio
Cash Ratio = (Cash + Marketable Securities) / Current Liabilities
Most conservative liquidity measure.
Leverage Ratios (Evaluate Debt Levels)
15. Debt-to-Equity (D/E) Ratio
D/E Ratio = Total Debt / Shareholders’ Equity
Measures financial leverage. It also shows how much debt is used to finance operations.
16. Interest Coverage Ratio
Interest Coverage Ratio = EBIT / Interest Expenses
ICR > 3 is safe; ICR < 1 means earnings can’t cover interest.
Assesses ability to pay interest on outstanding debt.
Efficiency Ratios (Measure Operational Performance)
17. Asset Turnover Ratio
Asset Turnover Ratio = Total Gross Revenue / Total Assets
Shows how well assets generate sales. Measure of asset utilisation.
18. Inventory Turnover Ratio
Inventory Turnover = Cost of Goods Sold /Average Inventory
Indicates how efficiently a company is managing its inventory. It measures the number of times a company sells and replaces its inventory during a given period, typically a year. A higher ratio suggests efficient inventory management and strong sales, while a lower ratio may indicate overstocking or slow-moving inventory.
19. Receivables Turnover Ratio or Debtor’s Turnover Ratio
Receivables Turnover Ratio = Net Credit Sales / Average Accounts Receivable
Average Accounts Receivable = (Opening Accounts Receivable + Closing Accounts Receivable)/2
Measures how quickly customers pay.
20. Days’ sales in receivables = 365 / Receivable Turnover Ratio
21. Average collection period = (Days × AR)/Credit sales
22. Average debtor collection period = (Trade Receivables/Credit sales )× 365
Displays the average collection period in days,
23. Average creditor payment period = (Trade Payables/Credit Purchases) × 365
Displays average payment period in days.
Market Performance Ratios
24. Earnings Per Share (EPS)
EPS = (Net Income – Preferred Dividends)/ Total No of Shares Outstanding
Shows profitability per share.
25. Beta Coefficient (β)
Beta is a key component of the Capital Asset Pricing Model (CAPM), which is widely used to determine the rate of return expected on Stock or Portfolio with respect to the market index, say, SENSEX. It is an indicator of the price volatility of a stock. If the Beta >1, Stock Return > Market Return in Bull Market but Stock Return < Market Return in Bear Market. If Beta = 1, Stock Return = Market Return.
β = Covariance(ra, rm) / Variance(rm)
Where:
ra = Return of the asset
rm = Return of the market (benchmark)
β = 1: The asset moves in line with the market.
β > 1: The asset is more volatile than the market (e.g., tech stocks).
β < 1: The asset is less volatile than the market (e.g., utilities).
26. Alpha (α)
Alpha is derived from CAPM. Indicates excess return compared to a benchmark or Market Index, say SENSEX.
α = Portfolio Return−[Risk-Free Rate+β×(Market Return−Risk-Free Rate)]
α= rp − [rf + β×(rm− rf)]
Where:
rp = Portfolio/asset return
rf = Risk-free rate (e.g., 10-year Treasury yield)
β = Beta (systematic risk)
rm = Market return (benchmark, e.g., S&P 500)
Dividend-Related Ratios
27. Dividend Payout Ratio
Payout Ratio = Dividends / Net Income
Shows proportion of earnings paid as dividends. Higher the Payout Ratio, better it is.
28. Dividend Coverage Ratio
Dividend Coverage = Net Income / Dividends Paid
Assesses ability to sustain dividends.
Growth Ratios (Is the Company Expanding?
These assess revenue, earnings, and cash flow growth.
29. Revenue Growth Rate
Revenue Growth = [(Current Revenue – Previous Revenue) / Previous Revenue]*100
30. EPS Growth Rate
EPS Growth = [(Current EPS – Previous EPS) / Previous EPS]*100
31. Free Cash Flow (FCF) Growth
FCF Growth = [(Current FCF – Previous FCF)/Previous FCF]*100
B. Ratios Used in Bond Analysis
32. Price-to-Book (P/B) for Bonds
Compares bond price to issuer’s book value per bond.
P/B = Bond Price / Book Value per Bond
Yield Measures
33. Current Yield
Current Yield = Annual Coupon Payment / Current Bond Price
Measures income return on the bond at its current price, ignoring capital gains/losses.
34. Yield to Maturity (YTM)
YTM = IRR of future cash flows (coupons + principal)
Total expected return if held till maturity (includes reinvestment risk).Takes into account coupon payments, time to maturity, and the difference between purchase price and par value.
35. Yield to Call (YTC)
YTC = IRR if bond is called before maturity
Relevant for callable bonds.
36. Yield to Worst (YTW)
Lowest potential yield (considering call, prepayment, or sinking fund provisions).
Credit Risk Ratios
37. Macaulay Duration
Macaulay Duration measures the weighted average time it takes for an investor to recover the bond’s price through its cash flows (coupons + principal). It is expressed in years and helps assess interest rate risk.
38. Modified Duration
Modified Duration measures a bond’s price sensitivity to changes in interest rates. It estimates the percentage change in bond price for a 1% change in yield (interest rates).
39. Convexity
Measures the curvature in the bond price–yield relationship. Helps improve accuracy of duration in estimating price changes for large interest rate movements.
Bond Valuation Ratios
40. Price-to-Coupon Ratio – The Price-to-Coupon Ratio (P/C Ratio) compares a bond’s current market price to its annual coupon payment. It helps investors quickly assess whether a bond is trading at a premium or discount relative to its income stream.
Price/Coupon = Current Bond Price / Annual Coupon Payment
41. Discount/Premium to Par – Discount to Par → Bond Price below face value. Premium to Par → Bond Price above face value.
Discount % = [(Face Value − Price)/ Face Value]×100
Spread Measures
Credit Spread is the difference in yield between two debt securities (usually bonds) with the same maturity but different credit quality. It reflects the additional compensation investors demand for taking on higher default risk.
42. Z-spread:
The Z-spread (Zero-Volatility Spread) measures the constant spread added to the entire Treasury spot-rate curve to make a bond’s discounted cash flows equal its market price.
43. OAS (Option-Adjusted Spread): Adjusted for embedded options like call/put features.
44. Bond Credit Spread:
Yield difference between a corporate bond and government bond of similar maturity. Example:10-year US Treasury yield Vs 10-year Apple corporate bond yield.
45. CDS Spread (Credit Default Swap Spread):
Annual fee to insure against a bond default (quoted in basis points).
46. Yield Curve Spread:
Difference between corporate bond yields at different maturities (e.g., 2-year vs. 10-year).
C. Ratios Used in Portfolio Performance
Used by fund managers and analysts to evaluate return, risk, and efficiency of portfolios:
47. Sharpe Ratio – Measures risk-adjusted return. Higher = better.
48. Treynor Ratio
Measures risk-adjusted returns by comparing excess returns to market risk (beta) instead of total volatility. Developed by Jack Treynor, it evaluates how well an investment compensates for systematic risk (undiversifiable market risk).
49. Jensen’s Alpha
Measures a portfolio’s excess return over its expected return based on the Capital Asset Pricing Model (CAPM). It shows whether a fund manager added value (positive alpha) or underperformed (negative alpha) after adjusting for market risk.
50. Information Ratio
The Information Ratio (IR) measures a portfolio manager’s ability to generate excess returns relative to a benchmark, adjusted for the volatility of those excess returns. It evaluates active management skill by comparing consistency in outperformance.
51. Sortino Ratio
Measures excess return per unit of downside risk (volatility of negative returns). Sortino Ratio focuses only on harmful volatility, making it ideal for assessing strategies where minimizing losses is critical.
D. Portfolio Attribution Metrics
52. Tracking Error
Itmeasures how closely an investment portfolio (or fund) follows its benchmark index. It quantifies the standard deviation of the difference between the portfolio’s returns and the benchmark’s returns over time.
Low tracking error → Portfolio closely mirrors the benchmark.
High tracking error → Portfolio deviates significantly from the benchmark.
Tracking Error = Standard Deviation of (Portfolio Return – Benchmark Return)
53. R-Squared (R²)
Derived from the Capital Asset Pricing Model (CAPM).R-squared (R²) measures how much of a portfolio’s or security’s performance can be explained by movements in a benchmark index. It ranges from 0% to 100%.
0% → No correlation with the benchmark.
100% → Perfect correlation.
R2= 1− (Unexplained Variance/Total Variance).
54. Active Share
Active Share measures the percentage of a portfolio’s holdings that differ from its benchmark index. It quantifies how “active” a fund manager is in deviating from the benchmark.
0% Active Share → The portfolio is identical to the benchmark.
100% Active Share → The portfolio holds completely different stocks than the benchmark.
55. Maximum Drawdown (MDD)
Maximum Drawdown (MDD) is a key risk metric used in finance to measure the largest peak-to-trough decline in the value of an investment portfolio, asset, or strategy over a specified time period. It quantifies the worst possible loss an investor could have experienced if they bought at the highest point and sold at the lowest subsequent point.
MDD = (Peak Value−Trough Value)/Peak Value
Peak Value = Highest portfolio value before a decline.
Trough Value = Lowest portfolio value before a new peak is reached.
MDD is expressed as a percentage (%).