Fundamental Analysis Ratios are key financial metrics used to evaluate a company’s performance, financial health, and intrinsic value. These ratios provide investors with quantitative tools to compare companies within the same industry, track performance over time, and make informed investment decisions. By analyzing ratios such as profitability, liquidity, leverage, and efficiency ratios, fundamental analysis ratios help translate complex financial statements into actionable insights.​ Visit tipstrade.org and check out the article below for further information

Fundamental Analysis Ratios

Fundamental analysis ratios are one of the most important tools in the stock market. They allow investors to measure a company’s real financial performance—not hype, not rumors, not short-term chart movements. Every successful long-term investor, from Warren Buffett to Peter Lynch, uses financial ratios to determine whether a stock is undervalued, overvalued, risky, or fundamentally strong.

This guide explains all the major fundamental analysis ratios in simple language, with examples and practical screening methods. Whether you’re a beginner or an experienced investor, learning how to analyze financial ratios will help you make better decisions and avoid dangerous stocks.

What Are Fundamental Analysis Ratios?

Fundamental analysis ratios are numbers calculated from a company’s financial statements—income statement, balance sheet, and cash flow. 

Why Investors Use Ratios

• Easy to compare companies in the same industry
• Reveal strengths and weaknesses hidden behind stock price
• Help filter thousands of stocks into a smaller watchlist
• Support long-term decisions using real business data

For example, if Stock A has a P/E ratio of 10 and Stock B has a P/E of 40, Stock B is more expensive relative to earnings—even if both have the same stock price.

The Four Major Types of Fundamental Ratios

To understand a business clearly, investors look at ratios across four categories:

• Valuation ratios
• Profitability ratios
• Growth ratios
• Financial health (debt/liquidity) ratios

Each category offers different insights. When combined, they create a complete picture of financial strength.

Valuation Ratios

Valuation ratios show whether a stock is cheap or expensive relative to its financial performance.

Price-to-Earnings Ratio (P/E)

Formula:
P/E = Stock Price ÷ Earnings per Share (EPS)

Investors love the P/E ratio because it shows how much you pay for $1 of earnings.

• Low P/E may signal undervaluation
• High P/E may mean high growth expectations or overpriced stock

Example:
Company A trades at $50 per share, EPS is $5 → P/E = 10
Company B trades at $50, EPS is $1 → P/E = 50

Company B is more expensive, even though the stock price is the same.

Benchmark

• Value stocks: P/E below 15
• Market average historically: 15–18
• Growth stocks: 25–50 or higher

PEG Ratio (Price/Earnings to Growth)

P/E doesn’t account for growth. That’s why professional investors use PEG:

Formula: PEG = P/E ÷ Earnings Growth Rate

PEG below 1 = undervalued for its growth
PEG above 1 = overpriced vs growth

Example:

• Stock P/E = 20
• Earnings growth = 25%
  → PEG = 0.8 (attractive)

PEG helps avoid stocks with high P/E but weak growth.

Price-to-Book Ratio (P/B)

Shows how much investors pay for a company’s net assets.

• P/B < 1.5 often signals value
• Best for banks, insurance, industrial companies

Example:
Banks with P/B below 1 may be undervalued if earnings are stable.

EV/EBITDA (Enterprise Value to EBITDA)

Professional analysts prefer EV/EBITDA because it includes debt and cash.

EV = Market Value + Debt – Cash

Lower EV/EBITDA = cheaper company
Benchmark:

• Below 10 = reasonable
• Below 7 = attractive

Dividend Yield & Payout Ratio

For dividend investors:

• Dividend Yield = Dividend ÷ Stock Price
• Payout Ratio = Dividend ÷ Net Income

Healthy companies typically keep payout below 70%.
Companies like Coca-Cola and Johnson & Johnson have long histories of sustainable dividends.

Profitability Ratios

These ratios show how efficiently a company turns sales and assets into profit.

Return on Equity (ROE)

Formula: Net Income ÷ Shareholder Equity

ROE shows how well management uses investor money.

• ROE > 15% = strong
• Warren Buffett prefers consistently high ROE companies

Example:
Apple and Microsoft have long-term ROE above 30%, reflecting powerful business models.

Return on Assets (ROA)

• Net Income ÷ Total Assets
• Shows how efficiently a company uses assets to generate profits.
• Useful for comparing asset-heavy industries like manufacturing and banking.

Net Profit Margin

Net Income ÷ Revenue
Shows how much profit remains after costs.

• High margin = strong pricing power
• Low margin = weak competition or rising costs

Example:
Software companies often have very high margins; grocery retailers have low margins due to competition.

Gross Margin & Operating Margin

• Gross Margin = Revenue – Cost of Goods Sold
• Operating Margin = Operating Income ÷ Revenue

These ratios help investors understand product profitability and business efficiency.

Growth Ratios

Growth ratios show whether the company is expanding revenue, profits, and cash flow.

Revenue Growth

Look for:

• 3-Year or 5-Year CAGR
• Steady upward trend

Fast-growing companies like NVIDIA or Tesla show strong double-digit revenue growth.

EPS Growth (Earnings Per Share)

When earnings grow faster than revenue, it may signal improving margins or better cost control.

Investors prefer:

• EPS growth > 10% per year
• Consistency over short-term spikes

Free Cash Flow Growth

• Free cash flow shows real money—not accounting profits.
• Companies can use FCF to pay dividends, reduce debt, or reinvest.

Example:
Many companies report profits but have negative cash flow—this is a red flag.

Financial Health Ratios

These ratios measure debt levels, liquidity, and bankruptcy risk.

Debt-to-Equity (D/E)

Total Debt ÷ Shareholder Equity

• D/E < 0.5 = safe
• High debt increases bankruptcy risk during recession

Example:
Many startups have high D/E because they rely on borrowing. Mature companies should have manageable debt.

Current Ratio & Quick Ratio

Current Ratio = Current Assets ÷ Current Liabilities
Quick Ratio excludes inventory

• Above 1.5 = strong liquidity

These ratios show whether the company can pay short-term obligations.

Interest Coverage Ratio

EBIT ÷ Interest Expense
Shows whether a company can pay its debt interest.

• Higher is better
• Ratio below 2 = danger zone

Sector Benchmarks Matter

A “good” ratio depends on the industry.

Sector	Typical P/E	Typical Net Margin	Typical D/E
Technology	25–40	High	Low–Medium
Banking	10–15	Medium	High normal
Retail	10–20	Low	Medium
Energy	5–15	Medium	High

This is why comparing Tesla’s P/E to Coca-Cola’s makes no sense—they are different industries.

Best Tools to Check Ratios

Free

• Yahoo Finance
• Finviz
• MarketWatch
• TradingView

Paid

• Morningstar
• Simply Wall St
• Gurufocus

Beginners can start with Finviz and Yahoo Finance—they show ratios clearly and allow screening.

Conclusion

Fundamental analysis ratios help investors make smarter, safer decisions. They reveal real business strength, not stock market hype. When used correctly—comparing sectors, analyzing history, and combining multiple ratios—they become one of the most powerful tools for building long-term wealth.