13 Financial Metrics You Must Analyze Before Buying Any Stock

Fundamental analysis is the bedrock of smart investing. Before you buy any stock, you need to know how the company is performing financially. Here’s a comprehensive guide to the most important financial parameters, how to interpret them, and the ideal benchmarks to look for.

1. Revenue Growth

• What it shows: The company’s ability to increase sales year over year.

• Benchmark: >10% YoY growth is healthy for growing companies.

• Example: A company with ₹500 Cr revenue in 2023 and ₹575 Cr in 2024 shows 15% growth.

• Why it matters: Revenue is the top line—everything else flows from it.

 

2. EBITDA (Earnings Before Interest, Tax, Depreciation & Amortization)

• What it shows: Operating profitability of the company.

• Benchmark: Should grow consistently, and EBITDA margin >15% is considered strong.

• Example: ₹100 Cr EBITDA on ₹500 Cr revenue = 20% EBITDA margin.

• Why it matters: Strips out non-operational costs to show core business performance.

 

3. EBITDA Margin

• Formula: EBITDA / Revenue × 100

• Benchmark: >15% for healthy companies, but varies by industry.

• Why it matters: Higher margin = efficient operations.

 

4. Net Profit / Profit After Tax (PAT)

• What it shows: True profit after all expenses and taxes.

• Benchmark: Consistent and growing PAT is a positive sign.

• Example: ₹80 Cr PAT this year vs ₹60 Cr last year = 33% growth.

• Why it matters: Determines shareholder value and dividend potential.

 

5. PAT Margin

• Formula: PAT / Revenue × 100

• Benchmark: >10% is considered good.

• Example: ₹50 Cr PAT on ₹400 Cr revenue = 12.5% PAT margin.

• Why it matters: Measures how much of revenue becomes profit.

 

6. Return on Equity (ROE)

• What it shows: How efficiently a company generates profits from shareholder equity.

• Formula: Net Income / Shareholder’s Equity

• Benchmark: >15% is excellent; >12% is good.

• Example: ₹75 Cr profit and ₹500 Cr equity = 15% ROE.

• Why it matters: Higher ROE means better use of shareholder funds.

 

7. Return on Capital Employed (ROCE)

• What it shows: How efficiently the company uses total capital (debt + equity).

• Formula: EBIT / (Debt + Equity)

• Benchmark: >15% indicates efficient capital use.

• Why it matters: Especially relevant for capital-intensive sectors.

 

8. Debt-to-Equity Ratio

• What it shows: The proportion of company financing that comes from debt.

• Formula: Total Debt / Shareholder’s Equity

• Benchmark: <1 is ideal, but can vary by industry.

• Example: ₹200 Cr debt and ₹400 Cr equity = 0.5 D/E.

• Why it matters: Lower debt = lower financial risk.

 

9. Current Ratio

• What it shows: Company’s ability to pay short-term obligations.

• Formula: Current Assets / Current Liabilities

• Benchmark: >1.5 is considered safe.

• Why it matters: Indicates liquidity and short-term health.

 

10. Free Cash Flow (FCF)

• What it shows: Cash generated after capital expenditures.

• Formula: Operating Cash Flow – CapEx

• Benchmark: Positive and growing FCF is best.

• Why it matters: Indicates company’s ability to reinvest, pay dividends, or reduce debt.

 

11. Earnings Per Share (EPS)

• What it shows: Earnings attributed to each share.

• Formula: Net Income / Number of Outstanding Shares

• Benchmark: Growing EPS over time is ideal.

• Why it matters: Ties directly to investor returns.

 

12. Price to Earnings Ratio (P/E)

• What it shows: How much investors are willing to pay for ₹1 of earnings.

• Formula: Share Price / EPS

• Benchmark: <20 is fair, <15 is undervalued, but industry-dependent.

• Example: Stock trading at ₹200 with EPS ₹10 = 20 P/E.

• Why it matters: Helps in valuation comparison.

 

13. Return on Assets (ROA)

• What it shows: How efficiently a company generates profit from its assets.

• Formula: Net Income / Total Assets

• Benchmark: >7% is good, >10% is strong, depending on the industry.

• Why it matters: Especially valuable when comparing companies with similar asset sizes or within asset-heavy sectors.

 

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📋 Final Checklist Before You Buy a Stock

Metric	Benchmark	✅ Check
Revenue Growth	>10% YoY
EBITDA Margin	>15%
PAT Growth	Consistently increasing
PAT Margin	>10%
ROE/ROA	>15% (min 12%)/>7% is good, >10% is strong
ROCE	>15%
Debt-to-Equity	<1
Current Ratio	>1.5
Free Cash Flow	Positive & consistent
EPS	Stable and growing
P/E Ratio	<20 (industry-adjusted)

 

 

FAQ’s

❓ What is a good ROE for a stock?

Answer: A Return on Equity (ROE) above 15% is generally considered excellent. It indicates that the company is efficiently generating profits from shareholders’ funds.

❓ What financial ratios should I check before buying a stock?

Answer: Key ratios include ROE, ROCE, EBITDA margin, PAT margin, Debt-to-Equity, Current ratio, and Free Cash Flow. These help assess profitability, efficiency, and financial health.

❓ How is EBITDA different from net profit?

Answer: EBITDA reflects the company’s core operating performance, excluding interest, taxes, depreciation, and amortization. Net profit includes all expenses, making it the true “bottom line.”

❓ Can a high P/E ratio still be good?

Answer: Yes, if the company has strong future growth potential, a high P/E can be justified. But compare it with industry peers and the company’s historical P/E.

❓ Is revenue growth more important than profit?

Answer: Both matter. Strong revenue growth without profit may mean inefficiency. Ideally, look for growing revenue with improving margins.

❓ How often should I do a fundamental analysis?

Answer: At least once per quarter after earnings reports. For long-term investors, a bi-annual review is often sufficient.

💡 Pro Tips for Smart Stock Selection

• Compare with Peers: Always benchmark metrics against industry averages.

• Ignore Short-Term Noise: Don’t base decisions on quarterly hiccups—look at 3–5 year trends.

• Don’t Ignore Management: Read annual reports and earnings call transcripts. Strong leadership drives long-term success.

• Avoid Excessive Debt: Even growing companies can collapse under financial leverage. Watch Debt-to-Equity.

• Use Screener Tools: Platforms like Dhan provide Scan X screener to make it easy to filter stocks by these metrics.

 

 

✍️ Conclusion

Fundamental analysis isn’t just for analysts—it’s a must for any serious investor. When you screen stocks using these 12 powerful metrics, you stack the odds in your favor. Always look for consistency, growth, and financial health across these parameters.

Apart from above things also do check:

Industry & Competitive Positioning:

• Market Leadership: Companies with strong brand value or market dominance tend to perform better.
• Competitive Advantage: Look for factors like unique products, strong distribution networks, or technological edge.
• Industry Growth Prospects: Investing in a growing sector enhances long-term returns.

 

Management & Governance:

• Promoter Holding: A high and stable promoter holding (above 50%) is usually a good sign.
• Corporate Governance: Ensure the company has no history of fraud, mismanagement, or regulatory issues.
• Dividend Policy: Regular and growing dividends indicate financial health.

 

Economic & Market Conditions:

• Inflation & Interest Rates: High inflation and interest rates can impact profitability.
• Government Policies: Favorable policies in taxation, subsidies, or industry-specific benefits can boost stocks.
• Foreign Institutional Investor (FII) & Domestic Institutional Investor (DII) Participation: Higher investments from institutions indicate confidence in the stock.

 

Technical Indicators (For Short-Term Trading):

• Relative Strength Index (RSI): Helps identify overbought or oversold conditions.
• Moving Averages: 50-day and 200-day moving averages indicate trends.
• Volume Analysis: Increasing trading volume suggests strong momentum.

 

Risk Factors:

• Cyclicality: Some sectors like real estate and automobiles are cyclical and fluctuate with the economy.
• Regulatory Risks: Changes in government policies, taxation, or legal matters can affect performance.
• Global Market Influence: Economic conditions in the U.S., China, or other major markets can impact Indian stocks.

Ultimately, successful investing requires a long-term perspective, disciplined research, and strategic decision-making to achieve sustainable returns in the ever-evolving stock market. 🚀📈

In the end remember this “Perfect is the enemy of good.” So keep learning. I wish you all the luck in your financial journey.

 

Learn How To Analyze Financial Statements Of A Company – P&L, Balance Sheet, Cash Flow

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Note: Please do your own research and make investment. Moneycontain will not be responsible for any of your losses at all. The point made is for educational purpose only and intended to give information. All investments are subject to risks, which should be considered prior to making any investments.

📌 Disclaimer: The content provided in this post is for educational and informational purposes only and does not constitute financial, investment, or trading advice. Always do your own research (DYOR) or consult with a certified financial advisor before making any investment decisions. Stock market investments are subject to market risks, and past performance is not indicative of future results. The author and publisher are not responsible for any financial losses incurred based on this information.