7 Key Ratios Every Investor Should Know Before Buying Stocks

 

Investing in the stock market has become easier and more accessible than ever. Yet, despite advanced tools and real-time charting platforms, one principle remains unchanged: successful investing starts with understanding a company’s fundamentals. Whether you’re a new investor or an experienced trader refining your strategies, financial ratios are powerful tools that help you judge a company’s performance, efficiency, valuation, and risk.

At Lares Algotech, one of the best stock broker companies in India, we believe that informed decisions lead to smarter wealth creation. This guide covers the 7 most important financial ratios every investor should know before buying stocks—so you can invest with confidence, clarity, and strategy.

 

1. Price-to-Earnings (P/E) Ratio – How Expensive Is the Stock?

The P/E Ratio is one of the most popular stock valuation tools. It reveals how much investors are willing to pay for every rupee of the company’s earnings.

Formula:

P/E Ratio = Current Market Price / Earnings Per Share (EPS)

Why It Matters

• Helps determine if a stock is undervalued or overvalued.
• High P/E indicates strong growth expectations.
• Low P/E may signal undervaluation—or underlying business risks.

Investor Insight

Compare a company’s P/E with:

• Industry average
• Historical P/E
• Competitor P/E

At Lares Algotech, traders use comparative valuation tools to judge whether they’re paying the right price for a stock before entering a position.

 

2. Price-to-Book (P/B) Ratio – What Is the Company Worth on Paper?

The P/B Ratio evaluates the market value of a company relative to its book value (assets minus liabilities).

Formula:

P/B Ratio = Market Price per Share / Book Value per Share

Why It Matters

• Indicates whether a company’s intrinsic value is higher or lower than its market value.
• A P/B < 1 may indicate an undervalued stock.
• Ideal for sectors like banking, financials, and capital-intensive industries.

Investor Insight

For long-term investors, the P/B ratio is a quick filter to identify companies trading below their asset value.

Lares Algotech’s research team often uses this ratio for deep-value stock analysis.

 

3. Debt-to-Equity (D/E) Ratio – How Risky Is the Company?

Leverage plays a crucial role in financial stability. The Debt-to-Equity Ratio tells you whether a company relies heavily on borrowed funds.

Formula:

D/E Ratio = Total Debt / Total Shareholder Equity

Why It Matters

• High D/E means higher financial risk.
• Helps identify if a company can handle economic downturns.
• Critical for evaluating companies in manufacturing, utilities, and infrastructure.

Investor Insight

A moderate D/E is ideal. High leverage may increase returns during expansion, but it can destroy shareholder value during downturns.

Lares Algotech helps retail traders assess company risk by integrating such ratios in algorithmic analysis dashboards.

 

4. Return on Equity (ROE) – How Efficiently Is the Company Generating Returns?

ROE measures how well a company uses investor capital to generate profit.

Formula:

ROE = Net Income / Shareholder Equity

Why It Matters

• High ROE signals efficient management.
• Useful for spotting consistent compounders.
• Helps identify companies with a strong track record.

Investor Insight

Look for:

• ROE above industry average
• Consistent ROE over multiple years
• Sustainable growth—not inflated by excess debt

Lares Algotech recommends studying multi-year ROE trends before committing to long-term investments.

 

5. Earnings Per Share (EPS) – How Much Profit Is Allocated Per Share?

A company’s EPS reveals its profitability on a per-share basis.

Formula:

EPS = Net Profit / Number of Outstanding Shares

Why It Matters

• Higher EPS indicates stronger profitability.
• Growing EPS trends signal potential stock appreciation.
• EPS impacts valuation ratios like P/E.

Investor Insight

EPS should always be analysed along with:

• Revenue growth
• Profit margins
• Cash flow

Lares Algotech tracks EPS changes across quarterly results to help investors identify emerging opportunities.

 

6. Current Ratio – Can the Company Pay Its Short-Term Obligations?

Liquidity is critical for business survival. The Current Ratio helps determine a company’s ability to meet short-term liabilities.

Formula:

Current Ratio = Current Assets / Current Liabilities

Why It Matters

• A ratio above 1 indicates healthy liquidity.
• Too high a ratio may show inefficient utilisation of money.
• Useful for evaluating operational stability.

Investor Insight

When analysing stocks, combine current ratio with:

• Cash reserves
• Inventory turnover
• Accounts receivable cycle

Lares Algotech encourages new investors to check liquidity ratios during earnings season to understand business stability.

 

7. Price-to-Earnings-Growth (PEG) Ratio – Is the Stock Fairly Priced for Its Growth?

The PEG Ratio adjusts the P/E ratio by including projected earnings growth, offering a more accurate valuation tool.

Formula:

PEG Ratio = P/E Ratio / Expected Earnings Growth Rate

Why It Matters

• PEG < 1 usually indicates undervaluation.
• Helps compare growth stocks effectively.
• Accounts for future potential, not just current profits.

Investor Insight

For fast-growing sectors like technology, fintech, healthcare, and consumer brands, PEG is a superior tool over standalone P/E.

Lares Algotech’s analytics engine uses PEG to help traders judge whether growth stocks are priced fairly.

 

How Lares Algotech Helps Investors Use These Ratios Smartly

Understanding ratios is one thing—using them effectively for real-world investing is another.
Lares Algotech empowers traders with:

✔ Advanced Charting & Ratio Analysis Tools

Integrated dashboards show valuation ratios, profitability scores, and leverage metrics at a glance.

✔ AI-Driven Screening

Filters stocks based on P/E, PEG, ROE, D/E, EPS trends, and more.

✔ Research-backed Insights

Daily and weekly reports help traders understand sector-wise financial health.

✔ Risk-first Approach

Recognising high-debt companies or overvalued stocks early helps investors reduce downside risks.

✔ Ideal for both new & experienced traders

Whether you're learning fundamentals or refining your investment strategy, Lares Algotech simplifies decision-making.

 

Final Thoughts: Ratios Don’t Lie—They Guide You Toward Better Investments

Financial ratios are not just numbers; they are signals that reveal a company’s strengths, weaknesses, valuation, and overall potential. The 7 key ratios discussed—P/E, P/B, D/E, ROE, EPS, Current Ratio, and PEG—should be part of every investor’s pre-investment checklist.

By combining these ratios with market trends, industry analysis, and portfolio strategy, you move closer to smarter, data-driven investing.

And with Lares Algotech, India’s trusted stock brokerage and trading solutions provider, investors get the right tools and insights to make informed decisions and build long-term wealth.