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NISM-Series-XV: Research Analyst · Company Analysis - Financial Analysis

Valuation Ratios and Per Share Metrics for NISM Research Analyst

Updated 11 October 2026 · Fact-checked

Valuation ratios compare a company's market price or value with its earnings, book value, EBITDA or dividends. Per share metrics like EPS and book value per share make that comparison possible. To solve questions, identify the ratio, pick the right numerator (price or enterprise value), match it to the right denominator, and compute.

Understand Valuation Ratios and Per Share Metrics

A valuation ratio answers one question: how much are you paying for each rupee of earnings, assets or cash flow? A high ratio can mean the stock is expensive or that the market expects strong growth. A low ratio can mean cheap or troubled. The ratio alone never gives a verdict.

Per share metrics come first. EPS (earnings per share) is profit available to equity shareholders divided by the weighted average number of equity shares. Diluted EPS adds the shares that could be created by convertibles, warrants and options, so it is equal to or lower than basic EPS. Book value per share is net worth divided by number of equity shares.

Price-based ratios use market price per share. P/E is price divided by EPS. P/B is price divided by book value per share. Dividend yield is dividend per share divided by price. These are equity-level ratios, so the numerator is what shareholders pay.

EV/EBITDA works at the whole firm level. Enterprise value is market capitalisation plus debt minus cash, plus minority interest and preference capital where present. EBITDA is earnings before interest, tax, depreciation and amortisation. Because both ignore how the firm is financed, EV/EBITDA lets you compare companies with different debt levels.

Payout ratio is dividends divided by net profit. Retention ratio is 1 minus payout. Match the numerator to the denominator: equity price goes with equity earnings, enterprise value goes with pre-interest earnings.

Key formulas to remember

Basic EPS
EPS = (Net profit − Preference dividend) ÷ Weighted average equity shares
Uses profit attributable to equity holders only.
Diluted EPS
Diluted EPS = Adjusted earnings ÷ (Weighted average shares + Potential dilutive shares)
Never higher than basic EPS in the usual case of dilution.
P/E ratio
P/E = Market price per share ÷ EPS
Earnings yield = EPS ÷ Price = 1 ÷ P/E.
Book value per share
BVPS = (Net worth − Preference capital) ÷ Number of equity shares
Net worth means equity shareholders' funds.
P/B ratio
P/B = Market price per share ÷ BVPS
Useful for banks and asset-heavy firms.
Enterprise value
EV = Market cap + Debt + Preference capital + Minority interest − Cash and equivalents
Cash is subtracted, debt is added.
EV/EBITDA
EV/EBITDA = EV ÷ EBITDA
Capital-structure neutral, so good for cross-company comparison.
Dividend yield
Dividend yield = Dividend per share ÷ Market price per share
Expressed as a percentage.
Dividend payout ratio
Payout = Dividend per share ÷ EPS (or total dividends ÷ net profit)
Retention ratio = 1 − payout ratio.

How to solve Valuation Ratios and Per Share Metrics questions

Use this sequence for any numerical or conceptual question on valuation ratios.

  1. 1Read what is asked and name the ratio.
  2. 2Decide if it is equity-level (P/E, P/B, yield) or firm-level (EV/EBITDA).
  3. 3List the given data and convert everything to per share or to total amounts, not a mix.
  4. 4Compute the missing building block first: EPS, BVPS or EV.
  5. 5Apply the ratio formula and check units, such as ₹ crore against ₹ crore.
  6. 6Sense-check: diluted EPS not above basic, payout between 0 and 1 for normal cases, EV above market cap if net debt is positive.
  7. 7Read the options carefully for trap values such as using the wrong share count.

Quickest way: Build-block shortcut

When to use it: Use when the question gives raw figures and four close numeric options.

  1. Write the one-line formula for the ratio.
  2. Compute only the missing block, such as EPS or EV.
  3. Divide once and match the nearest option.
  4. Use P/E = 1 ÷ earnings yield to flip between the two quickly.
  5. For payout questions, remember payout + retention = 1.

Common mistakes in Valuation Ratios and Per Share Metrics

  • Using EV with net profit or market price with EBITDA.

    Students memorise ratios without the logic of numerator and denominator.

    Fix: Equity price pairs with equity earnings. Enterprise value pairs with EBITDA.

  • Adding cash to EV instead of subtracting it.

    Cash feels like an asset that adds value.

    Fix: EV is the cost to take over the business. Cash you acquire reduces that cost, so subtract it.

  • Forgetting to deduct preference dividend when computing EPS.

    Net profit is used directly from the question.

    Fix: EPS belongs to equity holders. Subtract preference dividend first.

  • Thinking diluted EPS can exceed basic EPS.

    Confusion about added shares and added earnings.

    Fix: Diluted EPS assumes more shares, so it is normally lower than or equal to basic EPS.

  • Calling a low P/E always cheap and a high P/E always expensive.

    Ratios are treated as verdicts.

    Fix: Compare with peers, growth and risk. Say a ratio is low or high relative to something.

  • Using face value instead of market price for dividend yield.

    Dividend rates are often quoted on face value.

    Fix: Take dividend in rupees per share and divide by current market price.

Worked examples

Example 1

A company has net profit of ₹60 crore, preference dividend of ₹10 crore and 5 crore weighted average equity shares. The share trades at ₹150. Find EPS and P/E.

Show the solution
  1. Earnings for equity = 60 − 10 = ₹50 crore.
  2. EPS = 50 ÷ 5 = ₹10 per share.
  3. P/E = 150 ÷ 10 = 15.

Answer: EPS is ₹10 and P/E is 15 times.

Example 2

A firm has 10 crore shares at ₹200, debt of ₹500 crore, cash of ₹300 crore and EBITDA of ₹250 crore. No preference capital or minority interest. Find EV/EBITDA.

Show the solution
  1. Market cap = 10 × 200 = ₹2,000 crore.
  2. EV = 2,000 + 500 − 300 = ₹2,200 crore.
  3. EV/EBITDA = 2,200 ÷ 250 = 8.8.

Answer: EV/EBITDA is 8.8 times.

Exam tips

  • Expect direct formula questions: know EPS, P/E, P/B, EV and yield by heart.
  • Watch for questions asking why EV/EBITDA suits firms with different debt levels.
  • Check whether the question gives total figures or per share figures before dividing.
  • Know which ratio fits which sector, such as P/B for banks.
  • Under negative marking, skip a calculation only if the setup is truly unclear; most need one division.

Practice questions from Company Analysis - Financial Analysis

Valuation Ratios and Per Share Metrics in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Valuation Ratios and Per Share Metrics: frequently asked questions

What is the difference between EPS and diluted EPS?

Basic EPS divides equity earnings by weighted average shares outstanding. Diluted EPS also counts shares that could arise from convertibles, warrants and options. It is normally equal to or lower than basic EPS.

Why use EV/EBITDA instead of P/E?

EV/EBITDA ignores differences in debt, tax and depreciation policy. This makes it easier to compare companies with different capital structures. P/E is affected by leverage.

How is enterprise value calculated?

Add market capitalisation, debt, preference capital and minority interest, then subtract cash and equivalents. The result is the value of the whole business operations.

What does a payout ratio tell you?

It shows the share of profit paid out as dividends. The rest is retained for growth or reserves. A very high payout may leave little for reinvestment.