Financial Ratios in Plain Language: Margins, EPS, ROE

A financial ratio divides one number from a company’s statements by another, to make companies and periods easier to compare. Ratios are shortcuts: they summarise, and they can mislead when used carelessly. This guide explains the common ones. All numbers are invented for illustration.

At a glance

Ratio	Formula	What it describes
Operating margin	Operating profit ÷ revenue	How much of each rupee of sales remains after running costs
Net profit margin	Profit after tax ÷ revenue	How much of each rupee of sales becomes final profit
Earnings per share (EPS)	Profit after tax ÷ number of shares	Profit attributable to each share
Return on equity (ROE)	Profit after tax ÷ average shareholders’ equity	Profit relative to the owners’ capital in the business
Return on capital employed (ROCE)	Earnings before interest and tax ÷ capital employed	Operating profit relative to all the capital used
Debt-to-equity	Total borrowings ÷ shareholders’ equity	How much of the funding is borrowed rather than owned
Interest coverage	Earnings before interest and tax ÷ interest paid	How many times the operating profit covers interest
Current ratio	Current assets ÷ current liabilities	Ability to meet short-term obligations
Price-to-earnings (P/E)	Price per share ÷ EPS	The price paid for each rupee of earnings, as a fact about a price

Profitability ratios

Operating margin and net margin show how much of revenue is left at different stages. If revenue is ₹1,000 crore and operating profit is ₹150 crore, the operating margin is 15%. If PAT is ₹90 crore, the net margin is 9%. Comparing margins across quarters shows whether costs are growing faster than sales.

EPS is PAT divided by shares. If PAT is ₹90 crore and there are 30 crore shares, EPS is ₹3. EPS can change without profit changing, if the number of shares changes (for example after a bonus issue or a split).

ROE and ROCE relate profit to the capital behind it. Two firms with the same profit can have different ROE if one needed far more capital to earn it.

Leverage and safety ratios

Debt-to-equity of 0.5 means borrowings are half the size of shareholders’ equity. Higher borrowing is not wrong in itself, but interest must be paid whatever the profit. Interest coverage shows how comfortably operating profit covers that interest.

The current ratio compares what will turn into cash within a year against what is due within a year. A number below 1 is not automatically a problem in every business; look at how the business collects and pays.

The price-to-earnings ratio, as a definition

P/E divides a share price by EPS. It is a fact about a price at one moment, not a statement about whether that price is high or low. This site does not use it to judge any company, and the examples here use no real prices.

Common misreads

Comparing across sectors. A healthy margin or debt level in one industry can be unusual in another. Compare like with like.
One period only. A single quarter can be affected by seasonality; look at the same quarter a year ago. See year on year versus quarter on quarter.
Different definitions. Companies and data providers can define items such as EBITDA or net debt differently. Check the definition used.
Ratios on tiny bases. A large percentage on a very small number says little. Look at the absolute figure too.
Banks. Use different measures: net interest margin and non-performing assets. See how banks report results.

Try the arithmetic

The growth calculator computes percentage change between two figures, and the CAGR calculator gives the steady yearly rate between a start and an end value. Where the numbers come from is covered in how to read a quarterly result.

Common questions

What is a “good” ratio? There is no universal answer; it depends on the industry, the period and the definition. This guide explains what ratios measure, not what any company’s ratios should be.

Do ratios predict anything? They describe the past reported numbers. They are not forecasts.