The Microcap Minute Classroom. Module 2, chapter 4: Ratios That Matter: P/E, Margins, ROE, Debt <div class="learn" markdown="1"> **What you will learn** - Why ratios let you compare companies of very different sizes - The meaning of P/E, gross, operating and net margin, and ROE - Two simple questions that tell you whether debt is safe - Why a great-looking ratio is a question, not an answer </div> India scored 320 runs. Sounds amazing, but in how many overs? In a T20 match that is a miracle; in a 50 over match it is ordinary. Cricket fixes this with run rate: runs divided by overs. Investors do the same with ratios: one number divided by another, so a giant like Apple and a small company can be compared fairly. Four ratios cover most of what a beginner needs. **P/E ratio (price to earnings).** The share price divided by earnings per share. It answers a simple question: how many rupees am I paying for one rupee of yearly profit? If a share costs $200 and the company earns $10 per share, the P/E is 20. A high P/E means buyers expect strong growth. A low P/E means they expect little, or they are worried about something. **Margins.** A margin is a profit divided by revenue, written as a percentage. Gross margin: out of ₹100 of sales, how much survives the cost of making the product. Operating margin: how much survives the running costs as well. Net margin: the final keep, after interest and taxes. **ROE (return on equity).** Net income divided by shareholders' equity. It measures how hard the owners' money is working. A shop earning ₹20 lakh a year on ₹1 crore of the owner's money has an ROE of 20%. **Debt.** There is a formal debt to equity ratio, but for a first look, two plain questions work better. Is the debt smaller than the cash pile? And could a year or two of operating cash flow pay it all off? ## Apple's numbers Apple's gross margin is about 46%, its net margin about 24%: it keeps roughly ₹24 of every ₹100 of sales. Its debt of about $107 billion sits below its $157 billion cash and investments pile. Its P/E has spent recent years roughly between 25 and 35. The surprise is ROE: Apple's is above 100%. Wonderful? Not so fast. Remember from Chapter 2 that years of buybacks shrank Apple's equity. ROE divides by equity, so a tiny bottom number inflates the result. Always ask why a ratio looks extreme before celebrating it. And compare like with like. Nvidia, the chip company powering the AI boom, recently kept more than ₹50 of profit per ₹100 of sales, because great chips and software cost very little to copy. A supermarket chain would celebrate ₹3. Margins are born from the type of business, so only compare a company with similar neighbours. Push that idea one step further, because it protects you from a classic trap. Some checklists use a fixed pass mark: "gross margin above 20%" or "ROE above 25%". But one ruler cannot fit every business. A bank has no cost of goods sold, so its gross margin shows nearly 100%, a meaningless number. A distributor, which moves goods from makers to shops, lives on 3% or 4% margins by design. And a bank's ROE often sits near 10%, because the rules force banks to hold the thick equity cushion from Chapter 2. Use one ruler anyway, and you delete every bank and every distributor while waving through every software firm. Notice that every ratio is shown across many years; the trend matters far more than any single year. Notice the P/E and dividend yield sitting in the top stats panel; you now know what both of them mean. One honest warning to end. Ratios are a torch, not an answer. A low P/E can hide a dying business; a high P/E can hide a bubble. Ratios start questions. They never finish them. <div class="try" markdown="1"> **Try it yourself** Open [Apple's ratios page on StockAnalysis](https://stockanalysis.com/stocks/aapl/financials/ratios/?ref=MICROCAPMINUTE) and write down the latest year's gross margin, operating margin, net margin, and ROE. Then open [Microsoft's ratios page](https://stockanalysis.com/stocks/msft/financials/ratios/?ref=MICROCAPMINUTE) and write down the same four. In one sentence: which company keeps more profit from each ₹100 of sales, and by how much? </div> <div class="takeaways" markdown="1"> **Key takeaways** - A ratio divides one number by another so any two companies can be compared. - P/E is the price you pay for each rupee of yearly profit. - Margins show what survives each layer of costs; compare only similar kinds of businesses. - An extreme ratio, good or bad, demands a why before it means anything. - A ratio says very little alone; it means something against a peer or the company's own past. </div>. I am Ritu, a synthetic voice, and the words I am reading are Ayush Agrawal's.

# Ratios That Matter: P/E, Margins, ROE, Debt <div class="learn" markdown="1"> **What you will learn** - Why ratios let you compare companies of very different sizes - The meaning of P/E, gross, operating and net margin, and ROE - Two simple questions that tell you whether debt is safe - Why a great-looking ratio is a question, not an answer </div> India scored 320 runs. Sounds amazing, but in how many overs? In a T20 match that is a miracle; in a 50 over match it is ordinary. Cricket fixes this with run rate: runs divided by overs. Investors do the same with ratios: one number divided by another, so a giant like Apple and a small company can be compared fairly. Four ratios cover most of what a beginner needs. **P/E ratio (price to earnings).** The share price divided by earnings per share. It answers a simple question: how many rupees am I paying for one rupee of yearly profit? If a share costs $200 and the company earns $10 per share, the P/E is 20. A high P/E means buyers expect strong growth. A low P/E means they expect little, or they are worried about something. **Margins.** A margin is a profit divided by revenue, written as a percentage. Gross margin: out of ₹100 of sales, how much survives the cost of making the product. Operating margin: how much survives the running costs as well. Net margin: the final keep, after interest and taxes. **ROE (return on equity).** Net income divided by shareholders' equity. It measures how hard the owners' money is working. A shop earning ₹20 lakh a year on ₹1 crore of the owner's money has an ROE of 20%. **Debt.** There is a formal debt to equity ratio, but for a first look, two plain questions work better. Is the debt smaller than the cash pile? And could a year or two of operating cash flow pay it all off? ## Apple's numbers Apple's gross margin is about 46%, its net margin about 24%: it keeps roughly ₹24 of every ₹100 of sales. Its debt of about $107 billion sits below its $157 billion cash and investments pile. Its P/E has spent recent years roughly between 25 and 35. The surprise is ROE: Apple's is above 100%. Wonderful? Not so fast. Remember from Chapter 2 that years of buybacks shrank Apple's equity. ROE divides by equity, so a tiny bottom number inflates the result. Always ask why a ratio looks extreme before celebrating it. And compare like with like. Nvidia, the chip company powering the AI boom, recently kept more than ₹50 of profit per ₹100 of sales, because great chips and software cost very little to copy. A supermarket chain would celebrate ₹3. Margins are born from the type of business, so only compare a company with similar neighbours. Push that idea one step further, because it protects you from a classic trap. Some checklists use a fixed pass mark: "gross margin above 20%" or "ROE above 25%". But one ruler cannot fit every business. A bank has no cost of goods sold, so its gross margin shows nearly 100%, a meaningless number. A distributor, which moves goods from makers to shops, lives on 3% or 4% margins by design. And a bank's ROE often sits near 10%, because the rules force banks to hold the thick equity cushion from Chapter 2. Use one ruler anyway, and you delete every bank and every distributor while waving through every software firm. Notice that every ratio is shown across many years; the trend matters far more than any single year. Notice the P/E and dividend yield sitting in the top stats panel; you now know what both of them mean. One honest warning to end. Ratios are a torch, not an answer. A low P/E can hide a dying business; a high P/E can hide a bubble. Ratios start questions. They never finish them. <div class="try" markdown="1"> **Try it yourself** Open [Apple's ratios page on StockAnalysis](https://stockanalysis.com/stocks/aapl/financials/ratios/?ref=MICROCAPMINUTE) and write down the latest year's gross margin, operating margin, net margin, and ROE. Then open [Microsoft's ratios page](https://stockanalysis.com/stocks/msft/financials/ratios/?ref=MICROCAPMINUTE) and write down the same four. In one sentence: which company keeps more profit from each ₹100 of sales, and by how much? </div> <div class="takeaways" markdown="1"> **Key takeaways** - A ratio divides one number by another so any two companies can be compared. - P/E is the price you pay for each rupee of yearly profit. - Margins show what survives each layer of costs; compare only similar kinds of businesses. - An extreme ratio, good or bad, demands a why before it means anything. - A ratio says very little alone; it means something against a peer or the company's own past. </div>

That was chapter 4 of module 2. The text, the pictures and the exercise are on the lesson page. Thank you for listening.