1.Current ratio:

• Verify the current ratio of the company. It has to be between 1.33 to 3. If less than 1.33 then it is not good because it cannot generate enough cash if needed.

• Similarly, if the current ratio is greater than 3 then you should do an analysis of why it is greater than 3.

  1. Check the inventory in the balance sheet if it has a lot of inventory it means the company has manufactured a lot of products and failed to sell those

  2. In some exceptional cases, this can be ignored because if a company wants to acquire another company it generally keeps more cash reserves.

1. P/B ratio:

In simple words:

It gives an idea of at how much value the share is trading in the market.
Let's say if book value per share of a stock is 50 and its market price is 100. This means on paper (in the Balance sheet, when we subtract all liabilities from assets i.e. net worth) the worth of each share is 50 but it is trading in the market at 100. The reason could be it might perform well also sector-based. So always compare it with peer comapnies within same sector

Detailed explanation

• Book value: Book value for a company, in layman's terms, is like calculating the "net worth" of the company based on its financial statements. Imagine you're summing up the value of everything the company owns (its assets like buildings, equipment, cash in hand) and then subtracting everything it owes (its liabilities like loans, debts). What you're left with is the book value. It's a bit like figuring out what would happen if the company decided to sell everything it owned and pay off all its debts; the amount remaining would be the book value.

1. Market Price:

   • Definition: The market price of a stock is the current price at which the stock is trading on the stock exchange.

   • Determined by: It is determined by the supply and demand for the stock in the market, influenced by investor perceptions, market trends, and broader economic factors.

   • Reflects: The market price reflects what investors are willing to pay for the stock at a given moment, based on their expectations of the company's future prospects, earnings potential, and other macroeconomic factors.

   • Fluctuations: It can fluctuate widely, often influenced by investor sentiment, news, industry trends, and market speculation.

2. Book Value:

   • Definition: Book value, as explained earlier, is the net asset value of a company, calculated as total assets minus total liabilities.

   • Determined by: It's based on historical costs and accounting values on the company's balance sheet.

   • Reflects: Book value represents the intrinsic value of the company based on its financials, without speculation or future growth prospects.

   • Stability: Generally more stable than market price, book value changes primarily when the company's assets or liabilities change significantly.

The Price-to-Earnings (P/E) ratio is a key metric used to evaluate a stock's value, calculated as the market price per share divided by earnings per share. Sectors with high P/E ratios are often those where investors expect higher earnings growth in the future.

1. Technology Sector:

   • High P/E Reasoning: Often has high P/E ratios due to expectations of rapid growth, innovation, and the potential for disruptive technologies to capture new markets.

   • Example: Companies in cutting-edge fields like artificial intelligence, cloud computing, or semiconductor technology.

2. Healthcare and Biotechnology:

   • High P/E Reasoning: These sectors often have high P/E ratios because of the potential for groundbreaking medical or pharmaceutical discoveries, which can lead to substantial future earnings.

   • Example: Companies developing revolutionary drugs or medical technologies.

3. Consumer Discretionary:

   • High P/E Reasoning: Companies in this sector, especially those with strong brands or unique products, can have high P/E ratios due to their potential to generate significant profits during economic upturns.

   • Example: Luxury goods companies, high-end retailers, or companies with popular consumer brands.

4. Renewable Energy and Green Technology:

   • High P/E Reasoning: As the world shifts towards sustainable energy, companies in this sector are often valued highly for their future growth potential in a more environmentally conscious market.

   • Example: Solar, wind, and other renewable energy technology companies.

Understanding P/E Ratios in Context

1. Growth Expectations: High P/E ratios generally indicate that investors expect higher earnings growth in the future. However, this also implies higher risk, as these expectations may or may not materialize.

2. Sector Comparison: It's important to compare P/E ratios within the same sector, as what's considered high in one sector may be average or low in another.

3. Not the Sole Indicator: While a useful metric, the P/E ratio should be considered alongside other financial ratios and industry-specific factors for a comprehensive evaluation of a stock's value.

1. P/E ratio:

The amount of money an investor is willing to invest in a single share of a company for Re. 1 of its earnings. For instance, if a company has a P/E Ratio of 20, investors are willing to pay Rs. 20 in its stocks for Re. 1 of their current earnings.

P/E Ratio = (Current Market Price of a Share / Earnings per Share)

Example: Let's say you opted for a fixed deposit with the amount of 100rs and an ROI of 5%. Then the P/E, in this case, will be:
100/ 5 = 20. which means you are willing to pay 20 rupees to earn 1 rupee. Similarly, see the P/E of a stock it will be low actually. Always compare P/E with industrial P/E.

1. ROE(Return on Equity)

   Return on Equity (ROE) is a financial metric used to evaluate the profitability of a company in relation to its equity. It's calculated by dividing the company's net income by its shareholder equity. Essentially, it measures how efficiently a company is using the money invested by its shareholders to generate profits.

   ROE is important in the stock market for several reasons:

   1. Profitability Indicator: ROE is a key indicator of a company's profitability. A high ROE suggests that a company is efficiently using its capital to generate profits. This is particularly important for investors as it indicates potential for growth and dividends.

   2. Investment Decisions: Investors often use ROE to compare the profitability of different companies in the same industry. It helps in assessing which company is doing a better job of converting equity into profits, aiding in making informed investment decisions.

   3. Financial Health: A consistently high ROE can indicate a company's good financial health. It suggests that the company is capable of generating profits without needing excessive debt, which is a positive sign for investors.

   4. Performance Benchmarking: ROE is also used for benchmarking a company's performance over time or against its peers. A company's ROE can be compared with the industry average to evaluate if it's performing above or below par.

   5. Insight into Management Efficiency: ROE can provide insights into how effectively a company's management is using shareholders' funds. Efficient use of equity reflects good management decisions and operational strategies.

However, it's important to use ROE in conjunction with other financial metrics for a comprehensive analysis, as ROE alone doesn't account for debt and other factors that can affect a company's financial health.

1. Interest Coverage Ratio (ICR)
   Interest Coverage Ratio (ICR) is a financial metric used to determine how well a company can pay the interest on its outstanding debt with its current earnings. It's calculated by dividing a company's earnings before interest and taxes (EBIT) by its interest expenses for the same period. The formula is:

   ICR=EBITInterest ExpensesICR=Interest ExpensesEBIT​

   ICR is important for several reasons:

   1. Debt Servicing Capability: It measures a company's ability to meet its interest obligations. A higher ICR indicates that a company can easily cover its interest payments from its earnings, which is a sign of financial stability.

   2. Credit Risk Assessment: Lenders and creditors use the ICR to assess the risk of lending to a company. A low ICR suggests higher credit risk, as it indicates that the company may struggle to meet its interest obligations, increasing the risk of default.

   3. Investor Insight: Investors use ICR to gauge a company's debt burden and its ability to sustain operations through its earnings. A company with a low ICR may be at risk of financial distress, especially if earnings decline, making it a potentially riskier investment.

   4. Operational Efficiency: ICR can provide insights into a company's operational efficiency. Companies that generate sufficient earnings to cover their interest expenses are often seen as more efficient and stable.

   5. Benchmarking: Like other financial metrics, ICR can be used to compare companies within the same industry. This comparison can indicate how well a company is managing its debt relative to its peers.

However, ICR should not be viewed in isolation. It's important to consider it alongside other financial metrics and in the context of the company's overall financial situation, industry standards, and economic conditions. For instance, a company with a low ICR but significant cash reserves or strong growth prospects might not be as risky as the ICR alone would suggest.

It's crucial to remember that while ICR is a useful indicator of a company's ability to pay its interest expenses, it doesn't provide a complete picture of its financial health. Other metrics and factors should also be considered for a comprehensive assessment.

ICR above 1.5 is often considered safe, and 2 or higher is seen as strong, the ideal value can vary. The context, industry norms, and individual company circumstances must all be taken into account for a meaningful assessment.