A share is a small part of a business. Before buying it, it helps to know whether the business is healthy and whether its price is reasonable. These are the numbers most worth understanding.
Is the price reasonable?
- P/E (price to earnings): the share price divided by the profit per share over the last year. A P/E of 20 means you pay ₹20 for every ₹1 of yearly profit. Fast-growing companies usually have higher P/Es; compare a company with others in the same industry, not with the whole market.
- P/B (price to book): the price against the value of the company’s assets on its books. Most useful for banks and asset-heavy businesses; less so for software or brands, whose value isn’t on the books.
- PEG: the P/E divided by how fast earnings are growing. It asks whether a high P/E is backed by growth.
Does it make good money?
- Return on equity (ROE): profit as a share of the shareholders’ money in the business. Consistently high is good; very high with a lot of debt can be risky.
- Margins: how much of each rupee of sales is left as profit. Compare within an industry: supermarkets and refiners have thin margins by nature.
- Growth: whether sales and earnings per share have grown over several years, not just one.
Is it financially safe?
- Debt to equity: borrowing against shareholders’ money. High debt makes a business fragile when times get hard. (Banks are different: borrowing and lending is their business, so they are judged on bad loans and capital instead.)
- Interest coverage: how many times profits cover the interest bill.
- Cash flow: profit on paper should turn into cash. If it repeatedly doesn’t, find out why.
Who owns it? (Indian companies)
- Promoter holding: the founders’ or parent group’s stake. A steady, meaningful stake suggests they share your interests; a falling one deserves a question.
- Pledged shares: promoters sometimes pledge their shares to borrow. If the price falls, lenders may sell them, pushing the price down further.
What these numbers can’t tell you
They describe the past. They don’t capture the quality of management, competition, regulation or a new product. One number alone never tells the whole story: look for a consistent picture across several, and read the company’s annual report.
How i-wise helps
Stock Health grades each of these numbers Healthy, Caution or Red flag against published rules suited to the kind of business, with a one-line reason, the date and the source. See Stock Health.
General information for education, not investment, tax or financial advice. Rules, rates and limits change: check the official sources before acting, and consider a SEBI-registered investment adviser for advice on your own situation.