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Financial Ratios Analysis: Complete Guide for Indian Investors and Businesses

Master financial ratio analysis with this comprehensive guide. Learn liquidity, profitability, efficiency, and leverage ratios with Indian company examples and benchmarks.

11 min read Dec 6, 2025

Kavitha’s Investment Lesson

Kavitha invested in a company with impressive revenue growth—40% year-on-year for three years.

Six months later, the stock crashed 70%.

“But they were growing!” she complained to her mentor.

Her mentor pulled up the financials:

  • Revenue: ₹100 Cr (impressive)
  • Net Profit Margin: 2% (weak)
  • Debt-to-Equity: 4.5x (dangerous)
  • Current Ratio: 0.6 (liquidity crisis)
  • Interest Coverage: 1.2x (barely covering interest)

“Revenue grew, but the company was burning cash, drowning in debt, and barely surviving.”

Lesson: One number tells nothing. Ratios tell the whole story.

What is Ratio Analysis?

Definition

Financial Ratio Analysis is the technique of comparing different line items from financial statements to assess a company’s performance, financial health, and operational efficiency.

Why Ratios Matter

Single NumberWhat Ratio Reveals
Profit ₹10 CrIs it 2% or 20% of revenue?
Debt ₹500 CrIs it 0.5x or 5x of equity?
Sales ₹1000 CrHow much inventory supports it?
Assets ₹800 CrWhat return are they generating?

Categories of Ratios

  1. Liquidity Ratios: Can the company pay short-term obligations?
  2. Profitability Ratios: Is the company making money efficiently?
  3. Efficiency Ratios: How well are assets being utilized?
  4. Leverage Ratios: How much debt is the company using?
  5. Valuation Ratios: Is the stock fairly priced?

Liquidity Ratios

1. Current Ratio

Formula:

Current Ratio = Current Assets / Current Liabilities

Example:

  • Current Assets: ₹50 Cr
  • Current Liabilities: ₹25 Cr
  • Current Ratio: 2.0

Interpretation:

RatioMeaning
> 2.0Very comfortable (maybe excess cash)
1.5 - 2.0Healthy
1.0 - 1.5Adequate
< 1.0Liquidity stress

Industry Benchmarks:

IndustryTypical Current Ratio
FMCG1.2 - 1.5
Manufacturing1.5 - 2.0
IT Services2.5 - 4.0
Retail0.8 - 1.2

2. Quick Ratio (Acid Test)

Formula:

Quick Ratio = (Current Assets - Inventory) / Current Liabilities

Why exclude inventory? Inventory may take time to sell.

Example:

  • Current Assets: ₹50 Cr
  • Inventory: ₹15 Cr
  • Current Liabilities: ₹25 Cr
  • Quick Ratio: (50-15)/25 = 1.4

Interpretation:

RatioMeaning
> 1.0Good—can pay without selling inventory
0.5 - 1.0Acceptable
< 0.5Tight liquidity

3. Cash Ratio

Formula:

Cash Ratio = (Cash + Cash Equivalents) / Current Liabilities

Most conservative liquidity measure.

RatioMeaning
> 0.5Excellent cash position
0.2 - 0.5Adequate
< 0.2Low cash buffer

Profitability Ratios

4. Gross Profit Margin

Formula:

Gross Profit Margin = (Revenue - COGS) / Revenue × 100

What it shows: Pricing power and production efficiency.

Example:

  • Revenue: ₹100 Cr
  • Cost of Goods Sold: ₹60 Cr
  • Gross Profit: ₹40 Cr
  • Gross Margin: 40%

Industry Benchmarks:

IndustryTypical Gross Margin
IT Services30-45%
FMCG40-60%
Pharma50-70%
Automobile20-30%
Retail15-25%

5. Operating Profit Margin (EBIT Margin)

Formula:

Operating Margin = EBIT / Revenue × 100

What it shows: Core business profitability before interest and taxes.

Example:

  • Revenue: ₹100 Cr
  • EBIT: ₹15 Cr
  • Operating Margin: 15%
MarginAssessment
> 20%Excellent
15-20%Good
10-15%Average
< 10%Needs improvement

6. Net Profit Margin (PAT Margin)

Formula:

Net Profit Margin = Net Profit / Revenue × 100

What it shows: Bottom-line profitability after all expenses.

Example:

  • Revenue: ₹100 Cr
  • Net Profit: ₹10 Cr
  • Net Margin: 10%

Industry Benchmarks:

IndustryTypical Net Margin
IT Services15-25%
FMCG12-18%
Banking15-20%
Steel/Cement5-10%
Airlines0-5%

7. Return on Equity (ROE)

Formula:

ROE = Net Profit / Shareholders' Equity × 100

What it shows: Return generated on shareholders’ investment.

Example:

  • Net Profit: ₹30 Cr
  • Shareholders’ Equity: ₹150 Cr
  • ROE: 20%

Interpretation:

ROEAssessment
> 20%Excellent
15-20%Good
10-15%Average
< 10%Below par

Caution: High debt can inflate ROE artificially.

8. Return on Assets (ROA)

Formula:

ROA = Net Profit / Total Assets × 100

What it shows: How efficiently assets generate profit.

Example:

  • Net Profit: ₹30 Cr
  • Total Assets: ₹300 Cr
  • ROA: 10%
ROAAssessment
> 10%Excellent
5-10%Good
< 5%Poor asset utilization

9. Return on Capital Employed (ROCE)

Formula:

ROCE = EBIT / Capital Employed × 100

Where:
Capital Employed = Total Assets - Current Liabilities
               OR = Equity + Long-term Debt

What it shows: Return on all capital (equity + debt).

Example:

  • EBIT: ₹40 Cr
  • Capital Employed: ₹200 Cr
  • ROCE: 20%

Better than ROE when comparing companies with different debt levels.

Efficiency Ratios (Turnover Ratios)

10. Inventory Turnover Ratio

Formula:

Inventory Turnover = COGS / Average Inventory

What it shows: How many times inventory is sold and replaced.

Example:

  • COGS: ₹60 Cr
  • Average Inventory: ₹10 Cr
  • Inventory Turnover: 6 times

Days Inventory Outstanding (DIO):

DIO = 365 / Inventory Turnover = 365/6 = 61 days
TurnoverMeaning
High (>8)Fast-moving goods
Medium (4-8)Normal
Low (<4)Slow-moving, risk of obsolescence

11. Receivables Turnover Ratio

Formula:

Receivables Turnover = Net Credit Sales / Average Receivables

What it shows: How quickly customers pay.

Days Sales Outstanding (DSO):

DSO = 365 / Receivables Turnover

Example:

  • Credit Sales: ₹100 Cr
  • Average Receivables: ₹20 Cr
  • Receivables Turnover: 5 times
  • DSO: 73 days (customers take 73 days to pay)
DSOAssessment
< 30 daysExcellent collection
30-60 daysNormal
60-90 daysSlow
> 90 daysCollection issues

12. Payables Turnover Ratio

Formula:

Payables Turnover = Purchases / Average Payables

Days Payables Outstanding (DPO):

DPO = 365 / Payables Turnover

What it shows: How long company takes to pay suppliers.

DPOMeaning
High DPOUsing supplier credit (good for cash)
Low DPOPaying quickly (good supplier relations)

13. Asset Turnover Ratio

Formula:

Asset Turnover = Revenue / Average Total Assets

What it shows: Revenue generated per rupee of assets.

Example:

  • Revenue: ₹200 Cr
  • Average Assets: ₹100 Cr
  • Asset Turnover: 2x
RatioInterpretation
> 2.0High asset efficiency
1.0 - 2.0Moderate
< 1.0Asset-heavy business

14. Cash Conversion Cycle (CCC)

Formula:

CCC = DIO + DSO - DPO

What it shows: Days to convert inventory investment back to cash.

Example:

  • DIO: 60 days
  • DSO: 45 days
  • DPO: 30 days
  • CCC: 75 days
CCCAssessment
NegativeExcellent (paid before collecting)
0-30 daysVery good
30-60 daysNormal
> 90 daysWorking capital intensive

Leverage Ratios (Solvency Ratios)

15. Debt-to-Equity Ratio

Formula:

D/E Ratio = Total Debt / Shareholders' Equity

What it shows: How much debt is used relative to equity.

Example:

  • Total Debt: ₹100 Cr
  • Equity: ₹200 Cr
  • D/E: 0.5
D/EAssessment
< 0.5Conservative
0.5 - 1.0Moderate
1.0 - 2.0Leveraged
> 2.0Highly leveraged

Industry Differences:

IndustryAcceptable D/E
IT/Software< 0.2
FMCG0.3 - 0.5
Manufacturing0.5 - 1.0
Infrastructure1.5 - 2.5
Banking8 - 12 (different metric used)

16. Interest Coverage Ratio

Formula:

Interest Coverage = EBIT / Interest Expense

What it shows: Ability to pay interest from operating profits.

Example:

  • EBIT: ₹50 Cr
  • Interest Expense: ₹10 Cr
  • Interest Coverage: 5x
CoverageAssessment
> 5xVery safe
3-5xComfortable
2-3xAdequate
1-2xStressed
< 1xCannot cover interest (danger!)

17. Debt Service Coverage Ratio (DSCR)

Formula:

DSCR = (Net Profit + Depreciation + Interest) / (Principal + Interest)

What it shows: Ability to service total debt (principal + interest).

Example:

  • Net Profit: ₹30 Cr
  • Depreciation: ₹10 Cr
  • Interest: ₹10 Cr
  • Principal Repayment: ₹20 Cr
  • DSCR: (30+10+10)/(20+10) = 1.67x
DSCRAssessment
> 2.0Safe
1.5 - 2.0Adequate
1.0 - 1.5Tight
< 1.0Cannot service debt

18. Debt-to-EBITDA

Formula:

Debt/EBITDA = Total Debt / EBITDA

What it shows: Years to repay debt from operating cash flow.

Example:

  • Debt: ₹200 Cr
  • EBITDA: ₹50 Cr
  • Debt/EBITDA: 4x (4 years to repay)
RatioAssessment
< 2xLow leverage
2-3xModerate
3-5xHigh
> 5xVery high risk

Valuation Ratios

19. Price-to-Earnings Ratio (P/E)

Formula:

P/E = Market Price per Share / Earnings per Share

What it shows: How much investors pay per rupee of earnings.

Example:

  • Share Price: ₹500
  • EPS: ₹25
  • P/E: 20x
P/EGeneral Interpretation
< 10Undervalued or troubled
10-20Fairly valued
20-30Growth premium
> 30High expectations

Important: Compare P/E within same industry.

20. Price-to-Book Ratio (P/B)

Formula:

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

Book Value = (Total Assets - Total Liabilities) / Shares Outstanding

What it shows: Premium/discount to accounting value.

Example:

  • Share Price: ₹500
  • Book Value: ₹200
  • P/B: 2.5x
P/BInterpretation
< 1Trading below book value (potential value trap or opportunity)
1-2Reasonably valued
2-5Premium for quality
> 5High premium (growth/brand value)

21. EV/EBITDA

Formula:

EV = Market Cap + Total Debt - Cash

EV/EBITDA = Enterprise Value / EBITDA

What it shows: Valuation including debt, useful for comparing leveraged companies.

Example:

  • Market Cap: ₹1000 Cr
  • Debt: ₹200 Cr
  • Cash: ₹50 Cr
  • EV: ₹1150 Cr
  • EBITDA: ₹100 Cr
  • EV/EBITDA: 11.5x
EV/EBITDAAssessment
< 8Potentially undervalued
8-12Fair value
12-15Expensive
> 15Very expensive

22. Price-to-Sales Ratio (P/S)

Formula:

P/S = Market Cap / Annual Revenue

Useful for companies with negative earnings.

P/SInterpretation
< 1Cheap relative to sales
1-3Fair
> 3Premium for margins/growth

DuPont Analysis

Breaking Down ROE

Formula:

ROE = Net Profit Margin × Asset Turnover × Equity Multiplier

Where:
Net Profit Margin = Net Profit / Revenue
Asset Turnover = Revenue / Total Assets
Equity Multiplier = Total Assets / Equity

Example: Comparing Two Companies

MetricCompany ACompany B
ROE20%20%
Net Margin10%5%
Asset Turnover1.0x2.0x
Equity Multiplier2.0x2.0x

Same ROE, different sources:

  • Company A: Margin-driven (brand power)
  • Company B: Turnover-driven (volume business)

What Each Component Tells

ComponentHigh Value Indicates
Net Profit MarginPricing power, cost control
Asset TurnoverAsset efficiency
Equity MultiplierLeverage (higher = more debt)

Industry-Specific Ratios

Banking

RatioFormulaGood Level
NIM (Net Interest Margin)Net Interest Income / Average Assets> 3%
NPA RatioNPAs / Total Advances< 2%
CASA RatioCASA Deposits / Total Deposits> 40%
CAR (Capital Adequacy)Capital / Risk Weighted Assets> 12%

Insurance

RatioWhat It Measures
Claims RatioClaims Paid / Premium Earned
Combined RatioClaims + Expenses / Premium
Solvency RatioAvailable Capital / Required Capital

Real Estate

RatioWhat It Measures
Inventory DaysTime to sell inventory
Net Debt/EquityLeverage in land and construction
Pre-salesAdvance bookings (revenue visibility)

Ratio Analysis Framework

Step-by-Step Process

  1. Collect Data: 3-5 years of financial statements
  2. Calculate Ratios: Across all categories
  3. Trend Analysis: Are ratios improving or declining?
  4. Peer Comparison: Compare with industry/competitors
  5. Industry Context: Understand sector-specific benchmarks
  6. Qualitative Check: Validate numbers with business reality

Red Flags to Watch

Red FlagImplication
Rising D/E with falling ROCEDebt not generating returns
Increasing DSOCollection problems
Declining marginsCompetition/cost pressure
Interest coverage < 2xDebt stress
Current ratio < 1Liquidity crisis

Green Flags to Seek

Green FlagImplication
Rising ROE with stable D/EGenuine improvement
Negative CCCPowerful business model
Improving marginsPricing power/efficiency
Interest coverage > 5xFinancial strength
Consistent dividendCash generation

Practical Application

Quick Health Check (10 Key Ratios)

CategoryRatioHealthy Range
LiquidityCurrent Ratio1.5 - 2.5
LiquidityQuick Ratio> 1.0
ProfitabilityROE> 15%
ProfitabilityNet Margin> Industry average
EfficiencyAsset Turnover> 1.0
EfficiencyCCC< 60 days
LeverageD/E< 1.0
LeverageInterest Coverage> 3x
ValuationP/E< Industry average with growth
ValuationP/B< 3x

Where to Find Data

SourceWhat’s Available
Screener.inFinancial ratios, trends
MoneycontrolCompany financials
BSE/NSE websitesOfficial filings
Annual ReportsDetailed analysis
TrendlynePeer comparisons

Disclaimer

This guide is for educational purposes. Ratio analysis should be combined with qualitative assessment. Historical ratios don’t guarantee future performance. Different industries have different benchmarks. Consult a qualified financial advisor for investment decisions.

Summary

Financial ratio analysis reveals:

  1. Liquidity: Can the company pay its bills?
  2. Profitability: Is it making money efficiently?
  3. Efficiency: Are assets being used well?
  4. Leverage: How much debt risk exists?
  5. Valuation: Is the price reasonable?

Remember: No single ratio tells the complete story. Analyze trends, compare peers, and understand the business context.

Social Media Posts

LinkedIn: “A company with 40% revenue growth went bankrupt. Why?

The ratios told the truth: • Net Margin: 2% (barely profitable) • D/E: 4.5x (drowning in debt) • Interest Coverage: 1.2x (barely paying interest) • Current Ratio: 0.6 (can’t pay bills)

Revenue growth without profitability = House of cards

Before investing, check:

  1. ROE > 15%
  2. D/E < 1
  3. Interest Coverage > 3x
  4. Current Ratio > 1.5

One number tells nothing. Ratios tell everything. #FinancialAnalysis”

Twitter/X: “Quick Financial Health Check:

✅ Current Ratio > 1.5 (can pay bills) ✅ D/E < 1 (not over-leveraged) ✅ Interest Coverage > 3x (debt manageable) ✅ ROE > 15% (good returns) ✅ Net Margin > industry avg

Red flags 🚩 ❌ Current Ratio < 1 ❌ D/E > 2 ❌ Interest Coverage < 2

#StockMarket #FundamentalAnalysis”

Instagram: “Financial Ratios Decoded 📊

PROFITABILITY: 💰 ROE = Net Profit / Equity Good: > 15%

SAFETY: 🏦 Debt/Equity = Total Debt / Equity Good: < 1.0

LIQUIDITY: 💧 Current Ratio = Current Assets / Current Liabilities Good: > 1.5

VALUATION: 📈 P/E = Price / EPS Compare with industry

PRO TIP: Never look at one ratio alone!

Rising revenue + Falling margins = Red flag 🚩 Rising ROE + Stable D/E = Green flag ✅

#InvestingTips #StockAnalysis”

financial ratios ratio analysis financial analysis fundamental analysis company valuation