Financial ratios compress large financial statements into comparable signals. That convenience creates risk: a ratio can look attractive while hiding weak cash flow, unusual earnings, excessive leverage, or a business model that is not comparable with the selected peer.
Earnings per share (EPS)
EPS allocates profit attributable to ordinary shareholders across the relevant weighted-average shares. Compare the reporting period, standalone versus consolidated basis, dilution, and one-time items. Growth in EPS is more useful when supported by recurring operations and cash generation.
Price-to-earnings ratio (P/E)
P/E compares market price per share with earnings per share. A trailing ratio uses historical earnings, while a forward ratio depends on estimates. P/E is difficult to interpret when earnings are negative, unusually high, cyclical, or distorted by a one-off gain.
Price-to-book value (PBV)
PBV compares market value with accounting book value. It is often discussed for banks and asset-heavy businesses, but book value quality matters. Asset valuation, provisions, intangible assets, and return generated on equity can make two companies with the same PBV very different investments.
Return on equity (ROE)
ROE measures profit relative to shareholder equity. Higher is not automatically better: leverage can raise ROE while increasing risk. Compare ROE with debt, asset quality, margin stability, and the company's own history.
Dividend yield
Dividend yield compares dividend per share with market price. Decide whether you are using the most recent payout, trailing annual distribution, or an estimate. A high yield can be sustainable, temporary, or a warning that the market expects the payout to fall.
Compare ratios correctly
| Ratio | Useful question | Important limitation |
|---|---|---|
| EPS | How much profit is attributable per share? | Can include unusual or non-cash items |
| P/E | What price is paid for reported earnings? | Weak for losses or cyclical peaks |
| PBV | How does price compare with book equity? | Book-value quality varies by business |
| ROE | How effectively is equity producing profit? | Can be amplified by leverage |
| Yield | What cash distribution relates to price? | Future dividends are not guaranteed |
Use ratios as questions, not answers. Open a KseAlert stock page, compare the company with relevant PSX sector peers, and confirm source figures in financial statements.
A hypothetical ratio worked example
Assume a company reports annual earnings of PKR 1 billion and has a weighted average of 500 million ordinary shares. Basic EPS is PKR 2. If the market price is PKR 30, the simple trailing P/E is 15 times. If equity attributable to ordinary shareholders is PKR 10 billion, book value per share is PKR 20 and price-to-book is 1.5 times. If the relevant profit and average equity support the comparison, ROE is approximately 10%.
Those calculations are only the beginning. Ask whether earnings include a one-time gain, whether the share count may rise, whether equity contains assets whose carrying value is uncertain, and whether leverage is responsible for the reported return. A ratio calculated correctly can still be interpreted badly.
Match the ratio to the business
| Business feature | Extra context |
|---|---|
| Bank or lender | Asset quality, provisions, capital adequacy, deposit mix, and sustainable ROE |
| Cyclical producer | Normalized margins, commodity cycle, currency exposure, and replacement cost |
| Capital-intensive company | Debt, utilization, maintenance capital expenditure, and cash conversion |
| Fast-growing company | Reinvestment return, dilution, customer concentration, and durability of growth |
| Dividend-focused company | Payout coverage, cash flow, leverage, and stability through weak periods |
Ratio comparison rules
- Use the same reporting period and accounting basis.
- Prefer genuine peers rather than companies that only share a broad sector label.
- Recalculate when a source figure or share count looks inconsistent.
- Compare a set of ratios; no single multiple captures quality, growth, and risk.
- Record whether each value is trailing, annualized, forecast, or historical.