Key Stock Ratios: P/E, P/B, ROE & Dividend Yield

• Trailing P/E is grounded in concrete, audited facts from the past 12 months. However, it looks backward into the rearview mirror. • Forward P/E reflects future optimism. When analysts predict a company’s profits will surge 50%, a stock with a 30x TTM P/E appears to have an attractive "Forward P/E" of only 20x. • Risk: Indian brokerage analysts are notoriously optimistic during bull markets. If the projected profit boom fails to materialize, the stock crashes as its multiple compresses!

• FMCG (HUL, Nestle, Britannia): Trades at 50x–70x P/E because daily consumption (soap, tea, biscuits) is virtually immune to recessions, generates negative working capital, and requires zero debt. • IT Services (TCS, Infosys): Trades at 22x–30x P/E due to predictable dollar-denominated multi-year enterprise contracts and 80%+ cash conversion. • Cyclical / Commodities (Tata Steel, Vedanta): Trades at 6x–10x P/E at peak commodity prices. Counter-intuitively, cyclical commodity stocks are most dangerous when their P/E looks cheapest!

• A stock trading at a single-digit P/E (e.g., 6x) is not automatically a bargain. It could be a "Value Trap" — a company facing technological obsolescence, loss of market share, corporate governance misconduct, or one-off asset sale profits that will never recur. • Golden Rule: A high-quality company at 25x P/E with a 20% sustainable growth runway is vastly superior to a dying business at 7x P/E with zero growth.

• Developed by legendary Fidelity Magellan fund manager Peter Lynch to bridge the gap between Value and Growth investing. • Formula: PEG = P/E Ratio ÷ Expected Annual EPS Growth Rate (%). • Example: Company A has a P/E of 30 and grows earnings at 35% annually (PEG = 30 ÷ 35 = 0.85). Company B has a P/E of 15 but grows at only 5% annually (PEG = 15 ÷ 5 = 3.0). • Company A is mathematically much cheaper relative to its growth engine!

• A bank’s balance sheet IS its core business engine. It takes deposits (liabilities) and lends them out as mortgages, car loans, and corporate credit (assets). • Premium private banks (HDFC Bank, Kotak Bank, ICICI Bank) historically trade between 2.2x and 3.5x P/B because their underwriting discipline prevents loan defaults. • PSU Banks often trade between 0.8x and 1.5x P/B due to historic asset quality swings and government ownership constraints.

• Standard accounting rules (Ind-AS / IFRS) do not allow companies to record internally generated brand value or software source code as assets on the balance sheet. • Titan, Asian Paints, and Nestle create enormous profits with very little physical capital employed. Their P/B ratios look sky-high (15x to 35x), but this is not a sign of overvaluation; it is a sign of an extraordinary economic moat!

• If a textile or steel mill trades at 0.4x P/B, retail investors assume they are buying a rupee for 40 paise. • Reality Check: If the factory machinery is 25 years old and technologically obsolete, it cannot be sold for scrap value. If inventory cannot be sold and receivables turn into bad debt, the real book value is actually zero! • Always verify whether the book value consists of real cash and performing loans or illiquid legacy junk.

• When a company acquires other businesses at an expensive premium, it creates an accounting item called "Goodwill" on its asset sheet. • Tangible Book Value per share subtracts Goodwill and intangible assets from total equity. • Using Price-to-Tangible-Book (P/TBV) protects conservative investors from sudden write-downs when past overpriced acquisitions fail.

DuPont analysis breaks ROE down into three distinct operating drivers: 1. Net Profit Margin (PAT ÷ Revenue): Pricing power and cost discipline. 2. Asset Turnover (Revenue ÷ Total Assets): Asset efficiency — how many times assets turn into sales. 3. Equity Multiplier (Total Assets ÷ Equity): Financial leverage — how much bank debt is used. • High-quality ROE is powered by high margins (Titan) or high turnover (D-Mart), NOT by piling on debt!

• Example: Company X has ₹100 Cr Equity, ₹0 Debt, and makes ₹20 Cr Profit → ROE = 20%. • Company Y has ₹10 Cr Equity, ₹90 Cr Debt (Total capital ₹100 Cr), and makes ₹2.5 Cr Profit after paying heavy interest → ROE = ₹2.5 Cr ÷ ₹10 Cr = 25%! • An amateur screener ranks Company Y higher because 25% > 20%. In reality, Company Y is a debt-choked disaster one quarterly slowdown away from bankruptcy!

• ROE measures returns only on shareholder equity (PAT ÷ Net Worth). • ROCE measures operating profit generated from ALL long-term capital (EBIT ÷ [Equity + Long-term Debt]). • For companies with debt, ROCE is the superior metric because it cannot be artificially manipulated by borrowing money. Always check both ROE and ROCE together.

• A company cannot grow intrinsic value faster than its Return on Equity unless it raises external capital. • Intrinsic Growth Rate = ROE × (1 – Dividend Payout Ratio). • If an Indian franchise earns 28% ROE and retains 75% of profits (paying out 25% as dividend), its earnings compounding engine runs at 28% × 0.75 = 21% per year!

• 0% to 20%: Typical for fast-growing small-caps and mid-caps reinvesting all earnings into new production capacity, hiring, and R&D. • 30% to 60%: Ideal balanced "sweet spot" for mature leaders (TCS, Infosys, ITC). Rewarding shareholders while funding future growth internally. • 80% to 100%+: Red flag warning! The company is paying out more than it retains, starving itself of future growth capital or taking on debt to maintain payout optics.

• Retail investors frequently gravitate toward PSU commodity or paper companies yielding 9%–12%. • The Math Trap: Stock was ₹400 and paid ₹40 dividend (10% yield). Commodity prices crash, company profits drop 80%, stock price collapses to ₹160. • Next year, dividend is slashed to ₹4. The investor lost ₹240 in capital to earn ₹40 in dividends!

• Prior to 2020, Dividend Distribution Tax (DDT) was paid by companies. Today, dividends are taxed directly in the investor's hands at their slab rate. • For an investor in the 30% tax bracket, a 6% dividend yields only ~4.1% post-tax. • By contrast, long-term capital gains (LTCG) in Indian equities are taxed at a concessional 12.5% (above ₹1.25 Lakhs exemption). Growth compounding is vastly more tax-efficient!

• Unethical promoters can inflate reported earnings through fake debtor entries, capitalized expenses, or premature revenue recognition. • However, a company that has paid steady, growing cash dividends into shareholder bank accounts for 15 consecutive years proves that its reported profits are backed by cold, hard cash flow.