The P/E ratio gets all the attention. But a company's P/E alone tells you almost nothing without context. Professional analysts use a battery of ratios across profitability, liquidity, efficiency, and valuation to build a complete picture. Here are the most important ones beyond the basics.
| Ratio | Formula | What it tells you |
|---|---|---|
| Gross Margin | Gross Profit ÷ Revenue | How much of each pound of sales survives after direct costs. High = pricing power or scale advantage |
| Operating Margin | Operating Income ÷ Revenue | Profit efficiency after running costs — most comparable across companies |
| Net Profit Margin | Net Income ÷ Revenue | Bottom-line profitability — affected by tax and interest rates |
| ROE | Net Income ÷ Shareholders' Equity | How efficiently management uses equity capital. Buffett's benchmark: 15%+ |
| ROCE | EBIT ÷ Capital Employed | Return on all capital (equity + debt). Better than ROE for capital-intensive businesses |
| Ratio | Formula | Healthy range |
|---|---|---|
| Current Ratio | Current Assets ÷ Current Liabilities | 1.5–3× — above 1 means can cover short-term debts |
| Quick Ratio | (Current Assets − Inventory) ÷ Current Liabilities | 1×+ — excludes illiquid inventory, stricter test |
| Debt/Equity | Total Debt ÷ Shareholders' Equity | Under 1.5× for most industries; higher for capital-intensive sectors |
| Interest Coverage | EBIT ÷ Interest Expense | 3×+ — how many times earnings cover interest payments |
Enterprise Value (EV) = Market cap + Net debt. EBITDA = Earnings before interest, tax, depreciation and amortisation.
EV/EBITDA is preferred over P/E for comparing companies across different capital structures and tax situations. A company with no debt and one with heavy debt can have the same P/E but very different EV/EBITDA. Generally: under 10× is cheap for a stable business; 15–20×+ implies growth premium.
Price-to-Book (P/B): market cap ÷ book value (assets minus liabilities). A P/B below 1 means you're buying £1 of assets for less than £1. Banks and asset-heavy companies are often valued this way. Dangerous when book value overstates real asset quality (as seen in 2008 with bank balance sheets).
Free Cash Flow Yield: free cash flow per share ÷ share price. FCF is harder to manipulate than earnings. A high FCF yield means the company generates a lot of real cash relative to its market price — often a better "cheapness" signal than P/E alone.
The ratio that matters most varies by industry: for SaaS companies, gross margin and revenue growth are paramount. For banks, ROE and net interest margin. For retailers, inventory turnover and same-store sales growth. For miners, cost per unit of production. Always compare ratios to the industry peer group — a 10% net margin is mediocre for software but exceptional for a supermarket.
The price-to-earnings (P/E) ratio is a company's share price divided by its earnings per share. It tells you how much investors are paying for each £1 of profit — a P/E of 20 means you're paying £20 for every £1 of annual earnings.
There's no universal "good" number — it depends on the sector and growth rate. Mature, slow-growing companies often trade around 10–15, while fast-growing firms can trade well above 30. Compare a company's P/E to its own history and its peers, not to an absolute benchmark.
A high P/E usually means investors expect strong future growth — or that the stock is overvalued. It's a signal of high expectations, which the company then has to live up to.
New to this? Start with our guide on how to invest as a teenager in the UK, or revisit valuation basics.
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