S2 E5 : UNDERSTANDING PE RATIO, EPS, ROE, AND MORE
😅 Ever Seen This?
You’re checking a company on Groww or Zerodha.
You see confusing terms like:
- PE Ratio: 22.3
- EPS: ₹49
- ROE: 18%
- Market Cap: ₹1.5 Lakh Crore
Your brain goes: “Uhh… is this good or bad?” 😵
Don’t worry — we’ll break it all down using simple words and real examples.
Let’s go step-by-step 👇
📍 1. EPS – Earnings Per Share
EPS = Profit / Total Shares
🧠 Imagine Reliance made ₹1,00,000 crore profit in a year
And it has 1,000 crore shares
Then:
EPS = 1,00,000 ÷ 1,000 = ₹100
So for every share, the company earned ₹100.
✅ Higher EPS = More profitable company
(At least compared to its size)
📍 2. PE Ratio – Price to Earnings
PE = Share Price / EPS
It tells you how expensive the stock is.
🧠 Example:
- If Reliance share price is ₹2,200
- EPS is ₹100
- Then PE = 2200 ÷ 100 = 22
That means investors are willing to pay ₹22 for every ₹1 the company earns.
✅ Lower PE = Cheaper
❌ Higher PE = Expensive (unless justified by fast growth)
📝 Compare with peers in the same industry, not random companies.
📍 3. ROE – Return on Equity
ROE = (Net Profit / Shareholder’s Money) × 100
This shows how efficiently a company uses YOUR money (investor money).
🧠 Example:
- You give ₹100 to a company
- They earn ₹20 profit from that
Then ROE = 20%
Which is great.
✅ Higher ROE = Better performance
⛔ If ROE is below 10%, be cautious
📍 4. Market Cap – Company’s Total Size
Market Cap = Share Price × Total Shares
🧠 Example:
If Tata Motors share price = ₹700
And it has 300 crore shares
Then:
700 × 300 = ₹2,10,000 crore → That’s its market cap
✅ Market Cap tells you how big the company is:
- Less than ₹5,000 Cr → Small Cap
- ₹5,000 to ₹20,000 Cr → Mid Cap
- ₹20,000+ Cr → Large Cap
📍 5. Debt-to-Equity Ratio
This shows how much money the company borrowed vs. how much it owns.
🧠 Example:
If D/E = 2
It means for every ₹1 of own money, it borrowed ₹2
✅ Less than 1 is ideal
Too much debt = Risky during bad times
🧠 Recap Table:
📊 EPS (Earnings Per Share)
→ Tells you how much profit a company makes per share.
💰 PE (Price to Earnings)
→ Shows how expensive the stock is compared to its earnings.
📈 ROE (Return on Equity)
→ Measures how much profit is made from investor money.
🏢 Market Cap (Market Capitalization)
→ Reflects the size of the company in the stock market.
⚖️ D/E (Debt to Equity)
→ Indicates how much debt a company has compared to its own funds.
🧠 Real Example: HDFC Bank
| Metric | Value (Sample) |
|---|---|
| EPS | ₹49 |
| PE Ratio | 19 |
| ROE | 17% |
| Market Cap | ₹11 Lakh Crore |
| D/E | 0.9 |
📌 That means:
- HDFC Bank is profitable
- Fairly priced
- Safe (low debt)
- Efficient (good ROE)
✅ Strong choice for long-term investors
🎯 Final Tip:
These numbers don’t work alone.
Compare them:
- With competitors (e.g., HDFC Bank vs. ICICI Bank)
- With their past performance (5-year trend)
- With industry averages
Numbers + Common Sense = Smart Investing