EquityRoots
Glossary

Every ratio, demystified.

A working reference for the ratios the platform uses — formulas, plain-English meaning, when high is good vs bad, and the common traps. Read in order or jump to whatever you came for via the sidebar.

Profitability

How much profit the business squeezes out of its sales, assets, and equity. The core of the Quality pillar.

Return on Equity (RoE)

How much profit per ₹1 of shareholder capital.
RoE = Net Profit ÷ Shareholder Equity

What return the business is generating on the money owners have invested. The single most-cited quality metric in Indian investing.

When it's high
≥ 18% sustained is excellent; ≥ 15% is good. Compounders cluster here.
When it's low
< 10% suggests the business is destroying or barely preserving capital.
Caveat — RoE can be inflated by debt (more leverage → higher RoE without better operations). Always read alongside RoCE and Debt/Equity.

Return on Capital Employed (RoCE)

RoE adjusted for capital structure — the cleaner quality signal.
RoCE = EBIT ÷ (Total Assets − Current Liabilities)

Return on all the long-term capital in the business — equity AND debt. Strips out the leverage flattery RoE suffers from.

When it's high
≥ 20% sustained is the compounder zone. Asian Paints, Page Industries.
When it's low
< 12% is mediocre for a non-bank; below cost-of-capital for many.
Caveat — Comparing RoCE across industries is fair only roughly — capital-light IT services vs capital-heavy cement aren't apples-to-apples.

Return on Assets (RoA)

How efficiently the asset base earns.
RoA = Net Profit ÷ Total Assets

The bank's-eye view of profitability. For banks, a 1% RoA on a ₹10L crore book is the standard benchmark.

When it's high
Banks: ≥ 1.2% is good. Manufacturers: ≥ 10% is good.
When it's low
Banks: < 0.5% is weak. Non-banks: < 4% is weak.
Caveat — Mixing asset-heavy and asset-light companies makes this meaningless. Use within a peer cluster.

Operating Profit Margin (OPM)

How much of every ₹1 of sales is operating profit.
OPM = Operating Profit ÷ Revenue

Pricing power + cost discipline rolled into one number. The most-watched margin for non-financial businesses.

When it's high
Highly variable by industry. SaaS ≥ 25%, FMCG ≥ 20%, autos 8–12%, commodities 5–10%.
When it's low
OPM trending DOWN over 3–5 years is the warning — even if the absolute level looks fine.
Caveat — Operating profit includes depreciation in most Indian filings. Look at EBITDA margin separately if comparing across capex profiles.

Net Profit Margin (NPM)

Profit after interest and taxes, as % of sales.
NPM = Net Profit ÷ Revenue

The bottom line, scaled. Captures how much of revenue actually reaches shareholders after all costs.

When it's high
≥ 15% is strong for most non-financials.
When it's low
Sub-5% margins make the business fragile — a small input cost shock wipes it out.
Caveat — Net margins move with one-off items (tax benefits, asset sales). OPM and EBITDA margin are cleaner for trend analysis.

Gross Margin

Pricing power before fixed costs.
Gross Margin = (Revenue − COGS) ÷ Revenue

What's left after the cost of making the product, before paying rent, marketing, R&D, etc. The purest pricing-power measure.

When it's high
Software ≥ 70%, branded consumer ≥ 50%, commodities 15–25%.
When it's low
Falling gross margins = either rising input costs OR competitive price war.

Growth

How fast the top line, bottom line, and book value are compounding. Quality + Momentum both lean on these.

Revenue CAGR (3y, 5y, 10y)

The fundamental compounding rate.
CAGR = (End ÷ Start)^(1/years) − 1

How fast sales have grown on a compounded basis. We look at 3, 5, and 10 year windows so a single hot year doesn't dominate.

When it's high
≥ 15% sustained over 5y is excellent. ≥ 10% is good for mature businesses.
When it's low
< 5% sustained = either a stagnant industry or losing share. Check both before concluding.
Caveat — Revenue growth alone is hollow without margin discipline — a company can grow revenue 30% while losing money on every sale.

Earnings CAGR (PAT)

Bottom-line compounding.
Earnings CAGR = (End PAT ÷ Start PAT)^(1/years) − 1

Should be at or above Revenue CAGR for a healthy business — earnings growing faster than sales means margins are expanding.

When it's high
Earnings CAGR ≥ Revenue CAGR consistently = a compounding machine.
When it's low
Earnings CAGR << Revenue CAGR = the business is buying revenue with margin.

Operating Margin Trend

Are margins improving, flat, or eroding?
5-year slope of operating margin (% per year)

Whether the business is gaining or losing pricing power / cost discipline over time. A 5-year up-slope is a strong quality signal.

When it's high
+0.5 pp/year or more sustained = expanding economics. Rare and valuable.
When it's low
Negative slope over 3+ years = competitive pressure or input-cost pressure.

Valuation

Price relative to fundamentals. Higher percentile here means CHEAPER vs peers, not more expensive.

P/E Ratio (Price to Earnings)

How many years of current earnings the market is paying for.
P/E = Market Price per Share ÷ Earnings per Share (EPS)

The most-quoted ratio in retail investing — and often the most misused. A P/E of 25 means you pay ₹25 today for ₹1 of annual earnings.

When it's high
High P/E = market expects future earnings to grow. Justified if growth is real; a trap if expectations slip.
When it's low
Low P/E = market is skeptical. Could be cheap; could be earning a real warning.
Caveat — Compare only within an industry. A bank's natural P/E (10–18) is nothing like a software company's natural P/E (25–60). And avoid trailing P/E on cyclical businesses — peak earnings make them look cheaper than they are.

P/B Ratio (Price to Book)

Price per ₹1 of accounting net worth.
P/B = Market Cap ÷ Shareholder Equity

How much premium to book value the market is paying. Most useful for banks and asset-heavy businesses where book reflects real assets.

When it's high
P/B > 5 needs to be justified by RoE. HDFC Bank at P/B 3.5 with RoE 17% works; the same multiples on a 12% RoE bank don't.
When it's low
P/B < 1 = market thinks the stated book is impaired. Sometimes it is.

EV/EBITDA

Enterprise value vs operating cash earnings.
EV ÷ EBITDA, where EV = Market Cap + Debt − Cash

P/E's cleaner cousin — strips out leverage and tax differences so you can compare across capital structures. The standard valuation metric in equity research.

When it's high
EV/EBITDA above 20× implies very fast growth assumed.
When it's low
Cyclicals trade at 5–8× near peaks; that's still expensive if earnings collapse.

Free Cash Flow Yield

How much cash you'd get back per ₹100 invested.
FCF Yield = Free Cash Flow ÷ Market Cap × 100

Cash earnings divided by what you pay for the company. The most rigorous valuation lens — companies can't fake cash flow as easily as accounting earnings.

When it's high
≥ 5% is attractive on a stable business. ≥ 8% is rare and worth investigating.
When it's low
Negative FCF Yield is fine for a growth company (capex phase); a problem for a mature one.

Dividend Yield

Cash returned to shareholders, as % of price.
Dividend Yield = Annual DPS ÷ Market Price × 100

What you collect just for holding the share. PSU banks and utilities often anchor here; growth-mode tech rarely.

When it's high
≥ 4% is a real cash return on Indian large-caps. Watch sustainability.
When it's low
Sub-1% is normal for compounders that reinvest everything.
Caveat — Very high yields (8%+) often mean the market has marked the stock down because dividends are about to be cut.

PEG Ratio

P/E adjusted for growth.
PEG = P/E ÷ Earnings Growth Rate (%)

A P/E of 30 looks expensive — until you see 30% earnings growth. PEG normalizes that. The classic Peter Lynch metric.

When it's high
PEG > 2 = paying up. Sometimes justified for high-quality.
When it's low
PEG < 1 = potentially undervalued at the growth rate it's posting.

Balance Sheet & Solvency

Can the business survive a downturn? The plumbing — debt, liquidity, capital structure.

Debt to Equity (D/E)

How leveraged the balance sheet is.
D/E = Total Debt ÷ Shareholder Equity

How many rupees of debt for every rupee of owner capital. Higher leverage amplifies both gains AND losses.

When it's high
Manufacturers: > 1.5 = aggressive. Tech/services: > 0.5 is rare and concerning.
When it's low
Net cash (D/E < 0 after netting cash) is a fortress balance sheet.
Caveat — Banks and NBFCs run on D/E of 8–12 by design — comparing them to manufacturers is meaningless.

Debt to EBITDA

Years of cash earnings to repay debt.
Net Debt ÷ EBITDA

If the company stopped reinvesting and used all operating cash to pay down debt, how many years would it take?

When it's high
> 4× = stretched. > 6× = the rating agencies start downgrading.
When it's low
< 2× is comfortable. < 0 (net cash) is excellent.

Interest Coverage Ratio

How easily the company can pay interest on its debt.
EBIT ÷ Interest Expense

Operating profit divided by interest payments. The first thing lenders look at; the first thing that breaks in a downturn.

When it's high
≥ 5× is healthy. ≥ 10× is excellent.
When it's low
< 2× = one bad quarter from a default. < 1× means the business isn't earning its interest.

Current Ratio

Short-term solvency — can it pay its bills?
Current Assets ÷ Current Liabilities

Whether the company has enough short-term assets (cash, receivables, inventory) to cover what it owes in the next 12 months.

When it's high
≥ 1.5 is comfortable; many businesses run leaner without trouble.
When it's low
< 1 is a yellow flag — chronic working-capital stress.

Quick Ratio (Acid Test)

Current ratio without inventory.
(Cash + Receivables) ÷ Current Liabilities

The harsher liquidity test — excludes inventory because inventory can't always be sold quickly without discounts.

When it's high
≥ 1 = no liquidity issue.
When it's low
< 0.5 = the business is one bad month away from paying suppliers late.

Cash Flow

Reported earnings can be massaged with accounting choices. Cash flow tells you what actually came in.

Operating Cash Flow (OCF)

Cash generated by the core business.
Net Profit + Non-cash charges − Working Capital changes

The cash that actually came in from running the business — before any capex or financing. The single hardest number to fake.

When it's high
Positive and growing OCF is the hallmark of a real business.
When it's low
Persistently negative OCF for a non-growth-stage company is a red flag.

Free Cash Flow (FCF)

OCF after the capex the business needs to maintain itself.
FCF = OCF − Capital Expenditure

What's left for shareholders, debt repayment, or M&A after the business invests in its own continuation. The cleanest measure of value generation.

When it's high
Consistently positive FCF over a full cycle = real business.
When it's low
Companies in heavy capex phase have negative FCF — fine if returns will come; bad if it's just kicking the can.

Cash Conversion (CFO/PAT)

How much of reported profit becomes actual cash.
CFO ÷ Net Profit

If a company reports ₹100 of profit and brings in ₹95 of cash, conversion is 95% — healthy. If it brings in ₹40, the rest is sitting in receivables or inventory.

When it's high
≥ 80% sustained = high-quality earnings.
When it's low
< 60% over multiple years = accounting earnings ≠ economic earnings. Investigate.
Caveat — Growing businesses can show low conversion temporarily as working capital builds. Look at the multi-year average.

Momentum (Technical)

How the stock has moved vs the market, and how fundamentals are accelerating. Drives the Momentum pillar.

3M / 6M / 12M Relative Return

Outperformance vs the broader market.
(Stock Return − Index Return) over the period

Whether the stock is beating or losing to the market in that window. Multi-horizon blend separates short-term spikes from real trend.

When it's high
Positive across all three windows = consistent outperformance.
When it's low
Persistent underperformance is a real signal — usually fundamentals are slipping.

Earnings Momentum

How fast quarterly earnings are growing now vs a year ago.
Latest quarter PAT YoY growth %

Fundamental momentum at the most recent data point. Often leads price momentum by 1–2 quarters.

When it's high
≥ 30% YoY for two consecutive quarters = strong acceleration.
When it's low
YoY decline accelerating = the fundamentals are turning down.
Caveat — Compare YoY (same quarter last year), not QoQ — Indian businesses have strong seasonality (Q3/Q4 surge in many sectors).

Trend Strength

How smoothly the stock has trended in one direction.
Linear regression R² of price vs time over 6–12 months

A measure of whether price action is a clean trend or noise. Clean uptrends often continue; choppy ones often reverse.

When it's high
R² > 0.7 with positive slope = a real trend.
When it's low
Low R² = directionless; price is whipsawing.

Ownership & Flow

Who owns the stock and how that's changing. Quarterly signals — slower than price but more meaningful.

Promoter Holding

What % of the company the founders/insiders own.
Promoter shares ÷ Total outstanding shares

How much skin the founders have in the game. In Indian markets, high promoter holding (60%+) is usually a positive — they're aligned with shareholders.

When it's high
≥ 50% = founder-aligned. Tracking a rising promoter % QoQ is one of the strongest insider signals.
When it's low
< 30% AND falling = founders selling down. Worth knowing why.
Caveat — Watch promoter pledging — promoters can own 60% but have 80% of it pledged to lenders, which is fragile.

FII Holding

Foreign Institutional Investor ownership.
FII shares ÷ Total outstanding shares

How much foreign money is in the stock. FII accumulation is a flow story — they tend to move in and out together, in size.

When it's high
FII % rising for 2+ consecutive quarters in a mid-cap = a meaningful flow signal.
When it's low
FII selling is often the first sign of a multi-quarter de-rating.

DII Holding

Domestic Institutional Investor ownership (mutual funds, insurance, etc.).
DII shares ÷ Total outstanding shares

Indian institutional money — historically smaller than FII but growing fast with SIP flows. DIIs often buy what FIIs sell.

When it's high
DII accumulation is slower-moving and often a longer-term positive.
When it's low
Persistent DII selling is rarer and harder to ignore.
Cross-reference

From ratio to score

These ratios feed into the platform's three pillars. Each pillar percentile is built from a sector-tuned blend of the ratios above (specific weights vary by industry cluster).

  • Quality
    Does this compound?
    RoE, RoCE, OPM trend, Revenue/Earnings CAGR, Cash conversion
  • Valuation
    Fair price vs peers?
    P/E, P/B, EV/EBITDA, FCF Yield, Dividend Yield
  • Momentum
    Market noticing yet?
    3M/6M/12M relative return, Earnings momentum, Trend strength
Read the full methodology →