Introduction:
As we enter 2025, many investors are either beginning their journey into the stock market or revisiting their portfolios for rebalancing. Whether you’re just starting or fine-tuning your investments, having a strong base of common investment jargon and a solid analysis template is key to making informed decisions.
To help you evaluate companies or securities and build a strong portfolio, here are 8 fundamental indicators you can incorporate into your investment strategy in 2025.
Price-to-equity Ratio:
The price-to-equity ratio, or the P/E ratio, is one of the primary fundamental analysis indicators that many investment advisory firms and retail investors widely use. The P/E ratio evaluates whether a stock is overvalued or undervalued. It shows how much investors are willing to pay for each rupee of earnings. The formula to calculate it is:
P/E Ratio = Current Market Price per Share / Earnings per Share (EPS)
For example, if a company’s EPS is Rs.10, and its current market price is Rs.200, the P/E ratio is 20 (200/10). This means investors are ready to pay Rs.20 for every Re.1 the company earns as profit.
The P/E ratio is ideally measured on a scale starting at zero. That means a P/E of 0 indicates fair value, below 0 suggests undervaluation, and above 0 indicates overvaluation. However, in practice, it’s compared to the industry P/E or peers for better insight.
Let’s take an example of Company ABC in the FMCG sector. If its P/E is 27.33 while the industry P/E is 36.25, it’s considered undervalued. However, if ABC’s P/E rises to 37 or 40, it will be overvalued compared to the industry standard. Thus, the P/E ratio gives a basic idea of valuation, but it is insufficient to give the buying or selling signals for a particular stock or security.
To use the P/E ratio’s capacity to the fullest, compare companies in the same industry and combine it with other parameters to get a complete picture of the investment avenue.
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Projected Earnings Growth:
Another fundamental indicator is the PEG ratio, which takes the P/E ratio one step toward precision. The P/E ratio helps determine if a stock is cheap or expensive. It’s the relationship between the current share price and one year’s earnings per share. The PEG ratio takes it further by comparing the P/E ratio with the company’s earnings growth rate.
Imagine a company with a P/E ratio of 10. Its current earnings per share is Rs.10, expected to rise to Rs.12. This gives an expected earnings growth rate of 20% [(2/10)*100]. Using these numbers, the PEG ratio would be
PEG = EPS / EPS Growth rate = 10/20 = 0.5
A PEG ratio below 1 usually signals that a stock is undervalued, encouraging traders to buy. On the other hand, a PEG ratio above 1 suggests the stock might be overvalued, generally leading traders to sell. Here, a PEG of 0.5 means that the company’s shares are trading at a price lower than what its expected growth justifies.
Return on Equity:
ROE shows how efficiently a company generates profit from shareholders’ equity. A high ROE indicates efficient use of capital, while a falling ROE could mean weaker management or higher financial leverage. The formula used to calculate ROE is-
ROE = (Net Income / Shareholders’ Equity) × 100
For example, if a company earns a net income of, say, Rs.15,00,000 and has shareholders’ equity of Rs.60,00,000, its ROE would be
ROE = (15,00,000 / 60,00,000) × 100 = 25%.
This means the company generates 25 paise in profit for every rupee of equity.
What qualifies as a good ROE depends on the following factors:
- Capital intensity: Sectors like utilities and manufacturing need large assets and equity to operate, leading to lower ROEs. In contrast, tech companies often require less capital, resulting in higher ROEs.
- Profit margins: Tech and pharma firms with higher profit margins tend to have better ROEs. For instance, Infosys, a leading Indian IT company, has an ROE of around 31.8%, while NTPC, operating in the capital-intensive utility sector, has a much lower ROE of 13.5%.
- Debt: Companies with high leverage may show inflated ROEs, which come with increased risk.
- Growth stage: High-growth companies reinvest earnings, often leading to lower ROEs than mature firms.
So, when comparing ROE, it is important to ensure the companies are similar and operate in the same industry.
Debt-to-Equity Ratio:
The debt-to-equity ratio, another important fundamental indicator, shows the relationship between a company’s borrowed funds and shareholder capital. It shows how a company finances its assets and assesses its financial leverage. This ratio indicates how much shareholder equity can cover creditor obligations if the company faces financial trouble. It is calculated as
Debt to Equity = Total Debt / Shareholder’s Equity
Let’s say Company XYZ has borrowings of Rs.5,000 crore and shareholder equity of Rs.20,000 crore. Using the formula:
Debt to Equity Ratio = 5,000/20,000 = 0.25.
This means the company has Rs.0.25 in debt for every Re.1 of shareholder equity.
The debt-to-equity (D/E) ratio is typically compared to industry averages, competitor ratios, or a company’s historical ratios. A high ratio might indicate the company relies heavily on debt, which could affect its profitability and ability to pay dividends. It also signals higher financial risk if profits decline. Creditors often use this ratio to assess loan approval, as a high ratio may hint at potential bankruptcy.
In contrast, a low ratio shows the company depends more on equity financing, reducing the debt burden. A ratio of 1.0 to 2.0 is usually seen as healthy, but the ideal range varies across industries.
Earnings Per Share:
One of the primary parameters that comes up when answering ‘What is fundamental analysis indicator?’ is the EPS. It shows how much profit a company makes for each share of its stock. The following formula calculates EPS-
EPS = Net Profit / Number of Outstanding Shares
For example, consider ABC Ltd., which reported a net profit of Rs.8,00,000 for FY23 and has 80,000 outstanding shares of common stock. So,
EPS = Rs.8,00,000 / 80,000 = Rs.10
An EPS of 10 means the company earns Rs. 10 in profit for each outstanding share of stock. So, for every share you own, the company made Rs. 10 in profit during that period.
A single EPS number means little on its own. It becomes meaningful when compared to companies in the same industry or the company’s share price (P/E ratio). A higher EPS indicates better profitability between two companies with the same number of shares. EPS is often used alongside the share price to decide if a stock is “cheap” (low P/E ratio) or “expensive” (high P/E ratio).
Dividend Yield Ratio:
The Dividend Yield Ratio (DYR) shows how much dividend you earn per share for the company’s share price. It’s calculated using this formula:
DYR = Total dividend paid per year / Price per share
For example, if a company’s share costs Rs.200 and the dividend is Rs.5, the Dividend Yield Ratio is 2.5%. This means that for every Rs.100 invested in a company’s shares, you would earn Rs. 2.5 annually as a dividend. Different industries and companies will have varying yields.
A comparatively high dividend yield means the company pays investors a larger share of its profits. This might appeal to value investors, but it could also suggest the company isn’t reinvesting enough or its stock price has dropped. On the other hand, a comparatively low yield could indicate the company is reinvesting profits, facing losses, or has high debt. It may also prioritize growth over immediate returns.
Price-to-book Ratio:
The Price-to-Book (P/B) ratio compares a company’s market valuation to its book value. It helps you judge if a stock is undervalued, overvalued, or fairly valued. The formula to compute the P/B ratio is
P/B Ratio = Market Price Per Share / Book Value Per Share
So, say a stock trades at Rs.120 per share, and its book value per share is Rs.40; the P/B Ratio will be 3 (120/40). This means the stock is priced at thrice its book value.
As per the theory measures, a P/B ratio below 1 indicates the stock is undervalued, while a higher ratio suggests overvaluation or expectations of future growth. However, the ideal ratio varies by industry, so comparing a company’s P/B ratio with its industry standard is crucial for accurate evaluation. Always consider the business sector or industry as the general level of PB ratio in one may differ from another.
Revenue Growth Rate:
Revenue growth is a company’s income increase over time, measured quarterly or annually. It highlights market share and competitiveness. Consistent growth often points to a healthy, expanding business. However, you must analyze revenue and profit margins to understand financial health better.
Ideal or preferable growth rates differ by industry and company stage. Startups may see high percentage growth due to smaller revenue bases, while mature companies often have stable but moderate growth. These firms focus more on retaining customers and improving operations, as they’ve already captured a significant part of their market.
Bottomline:
Fundamental analysis remains a powerful tool for understanding a company’s financial health, especially when combined with a reliable stock screener. These indicators provide valuable insights, but evaluating them within the context of industry trends, economic conditions, and the company’s strategy is crucial.
A well-rounded approach, blending fundamental analysis with other methods, will equip you to make informed decisions and confidently navigate the dynamic stock markets of 2025.
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Disclaimer Note: The securities quoted, if any, are for illustration only and are not recommendatory. This article is for education purposes only and shall not be considered as a recommendation or investment advice by Equentis – Research & Ranking. We will not be liable for any losses that may occur. Investments in the securities market are subject to market risks. Read all the related documents carefully before investing. Registration granted by SEBI, membership of BASL & certification from NISM in no way guarantee the performance of the intermediary or provide any assurance of returns to investors.
FAQ
What is free cash flow?
Free cash flow is the cash a company earns from operations after covering capital expenses. This fundamental analysis indicator shows how well the company can invest in growth, pay dividends, or reduce debt.
What does ROCE indicate?
Return on Capital Employed helps you understand a company’s profitability and how efficiently it uses capital. It shows the profit generated for every rupee of capital employed, giving a clear picture of long-term performance.
What does a P/S ratio indicate?
The P/S ratio shows how much investors are paying for every rupee of a company’s sales. A low ratio might mean the stock is undervalued, while a high one could point to overvaluation.
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I’m Archana R. Chettiar, an experienced content creator with
an affinity for writing on personal finance and other financial content. I
love to write on equity investing, retirement, managing money, and more.
