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Day 65: Basic Stock Market Concept
What is ROCE (Return
on Capital Employed)?
ROCE is a financial metric shows how well a company uses both its equity
and debt to generate profits. It is typically calculated as Earnings Before
Interest & Taxes (EBIT) divided by Capital Employed (assets minus current
liabilities).
A higher ROCE suggests how efficiently the company
is deploying its capital. But you should compare it with industry peers,
because “good” ROCE varies across sectors.
What is ROE (Return
on Equity)?
ROE is a financial metric in the stock market used
to calculate a company’s profitability. ROE tells you how much profit a company
generates from its shareholders’ equity. It is calculated as Net Income divided
by Shareholders’ Equity.
If a company has high and consistent ROE, it
suggests management is good at utilizing shareholder funds to create value. But
be cautious, a very high ROE can sometimes indicate too much debt is used.
What is the P/E Ratio (Price to Earnings)?
The P/E ratio is a valuation metric calculated as
the share price divided by the earnings per share (EPS) of the company. It
gives a sense of how much investors are willing to pay today for a rupee of
future earnings.
A high P/E can mean high expected growth, or that
the stock is over-valued; a low P/E might indicate undervaluation or weak
growth.
What is the P/B
Ratio (Price to Book)?
P/B ratio or price to book ratio compares a
company’s market value (share price) to its book value (assets minus
liabilities) per share. For example, a P/B below 1 might suggest the market
values the company’s assets less than the stated book value—potentially
undervalued (though subject to caveats).
And if a stock with a PB ratio above 1 indicates
the stock is trading at a premium. This metric is very useful in sectors like
banking and real estate.
What is EPS (Earnings
Per Share)?
EPS shows the portion of a company’s profit
that is allocated to each outstanding share of common stock. Simply put: If a
company earns ₹ 100 crore net profit, and has 10 crore shares outstanding, its
EPS is ₹10. It’s a key number for comparing profitability across companies and
for calculating P/E.
What is Dividend
Yield?
Dividend Yield is the annual dividend per
share divided by the share price, expressed as a percentage. It shows how much
return (in terms of cash dividend) an investor gets relative to the current
share price.
A higher yield can be attractive, but one must
check if it’s sustainable (i.e., if the company can afford the dividends given
its profits and cash flows).
What is CAGR (Compound
Annual Growth Rate)?
CAGR
represents the annualized growth rate of a metric (e.g., revenue, earnings)
over a period, assuming the growth is steady and compounding year after year.
For example, if revenue grew from ₹100 crore to ₹200 crore in 5 years, the CAGR
tells you by what rate it would have had to grow each year to reach that
doubling. It gives a smoother picture than simple average growth.
What is Asset
Quality (in Company Fundamentals)?
Asset quality refers to how ‘good’ the assets of
the company are — especially in terms of risk, credit-risk, non-performing
assets, etc. For banks, for example, loan portfolios are assets and if many
loans go bad, asset quality is weak.
For non-banks, it might mean how healthy the
receivables, inventory or fixed assets are. Poor asset quality increases risk.
Why should you look
at a company’s Debts & Management Speech when analyzing
fundamentals?
Debts: A company
carrying high debt has more risk: interest expense, repayment burden,
refinancing risk. It affects both ROCE and ROE (through leverage) and may
reduce future returns.
Management Speech: Reviews of annual
reports, earnings calls, management presentations give qualitative insight: how
the management sees the business, growth plans, risk-factors, debt strategy,
and whether they focus on value creation. A strong management speech aligned with
good fundamentals boosts confidence.
What do QOQ and YOY Mean?
QOQ (Quarter-on-Quarter) compares a
company’s performance (revenue, profit, etc.) in one quarter to the previous
quarter.
YOY (Year-on-Year) compares
performance in a quarter or year to the same quarter/period in the previous
year.
These help understand short-term trends (QOQ) and longer-term consistency
(YOY). If a company’s YOY growth is strong and steady, that’s a good sign.
if you have any other questions in your mind relating to stock market basics or need any clarification, please put your query into the comment box, We will try our best to clarify the same
Disclaimer: The information provided on MoneyWiseMind is for educational and informational purposes only. It is not intended to be financial advice, and you should not rely on it as such. Before making any financial decisions, you should consult a licensed financial advisor.
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