2. Key Ratios Every Beginner Should Know: EPS, P/E, Market Cap, Dividend Yield and Beta

How to Read Stocks – 10 posts for beginners | Post 2 of 10

Ratios turn a company's financial statements into simple numbers you can compare. Here are the five you will see most often.

EPS (Earnings Per Share)

EPS = Net profit ÷ Number of shares

If a company earns ₹100 crore in a year and has 10 crore shares, its EPS is ₹10. Rising EPS over several years is a sign of a growing business. Most quote pages show the "TTM" EPS – the trailing twelve months.

P/E (Price-to-Earnings) Ratio

P/E = Share price ÷ EPS

If the share price is ₹200 and EPS is ₹10, the P/E is 20. This means investors are paying ₹20 for every ₹1 of annual profit.

  • A high P/E often reflects high growth expectations.
  • A low P/E may suggest the stock is cheap, or that the market sees problems.
  • Always compare P/E within the same sector and with the company's own history. The Nifty 50's overall P/E is published daily by NSE and gives a sense of how expensive the market is as a whole.
EPS and P/E in two steps

Market Capitalisation

Market cap = Share price × Total shares

It tells you the size of the company in the market's eyes. In India, the top 100 companies by market cap are large caps, 101–250 are mid caps, and the rest are small caps.

Dividend Yield

Dividend yield = Annual dividend per share ÷ Share price × 100

If a company pays ₹5 per share in dividends during the year and the share price is ₹100, the yield is 5%. Note that dividends are not guaranteed; the board decides each time. In India, dividends are taxable in the hands of the shareholder at their income tax slab.

Market cap and dividend yield

Beta

Beta measures how much a stock tends to move compared with the overall market (usually the Nifty 50).

  • Beta = 1 – moves roughly in line with the market.
  • Beta above 1 – tends to move more than the market, up and down.
  • Beta between 0 and 1 – tends to move less than the market.
  • Negative beta – tends to move opposite to the market (rare for stocks).

Beta is based on past data, so it can change over time.

Beta: movement vs the market

Using ratios wisely

No single ratio tells the whole story. A low P/E company with falling profits may be riskier than a high P/E company with strong growth. Use several ratios together, compare with peers, and look at trends over five years or more.

Using ratios wisely

Key takeaways

  • EPS shows profit per share; P/E shows how much you pay for that profit.
  • Market cap measures size; dividend yield measures cash returned.
  • Beta indicates volatility versus the market. Use ratios together, never alone.

Practise it: try these ideas risk-free with virtual money on GPS-AUTOTRADE India paper trading.

Disclaimer: This post is for education only. It is not investment advice or a recommendation to trade any security. Investments in the securities market are subject to market risks; read all related documents carefully and do your own research.

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