NISM-Series-XV: Research Analyst · Terminology in Equity and Debt Markets

Equity Valuation Ratios and Terms for NISM Research Analyst

Updated 11 October 2026 · Fact-checked

Equity valuation ratios compare a company's share price or value with its earnings, book value, dividends or EBITDA. EPS = profit ÷ shares. P/E = price ÷ EPS. P/B = price ÷ book value per share. Dividend yield = DPS ÷ price. EV/EBITDA = (market cap + net debt) ÷ EBITDA.

Understand Equity Valuation Ratios and Terms

A share price alone tells you nothing about whether a stock is cheap or costly. A ₹2,000 share can be cheaper than a ₹50 share. Valuation ratios fix this by comparing price with something the company earns or owns.

Earnings per share (EPS) is the profit that belongs to equity shareholders, divided by the number of shares. Price-to-earnings (P/E) divides the market price by EPS. It shows how many rupees you pay for each rupee of annual earnings. Price-to-book (P/B) divides the price by book value per share, which is net worth divided by shares outstanding. Net worth means equity share capital plus reserves.

Dividend per share (DPS) is the dividend paid on each share. Dividend yield is DPS divided by price, so it is the cash return from dividends alone. Dividend payout ratio is DPS ÷ EPS, the share of profit paid out. The rest is retained.

Market capitalisation is share price multiplied by the number of shares outstanding. It is the market value of the equity only. Enterprise value (EV) adds net debt to market cap, so it values the whole business for both lenders and shareholders. EV/EBITDA compares EV with operating profit before interest, tax, depreciation and amortisation. Because it ignores capital structure, it suits comparing companies with different debt levels.

Exam questions test two things: the exact formula, and what the ratio says. A high P/E may mean high growth expectations or an overpriced stock. A low P/B may mean undervaluation or poor returns. Always compare with peers in the same industry.

Key formulas to remember

Earnings per share: EPS = (Net profit − preference dividend) ÷ weighted average equity shares; Basic EPS uses profit available to equity shareholders.
Price-to-earnings: P/E = Market price per share ÷ EPS; Equivalent: Market cap ÷ Net profit. Earnings yield is the inverse, EPS ÷ Price.
Book value per share: Book value per share = Net worth ÷ Number of equity shares; Net worth = share capital + reserves and surplus.
Price-to-book: P/B = Market price per share ÷ Book value per share; Uses balance sheet value, so it suits asset-heavy firms such as banks.
Dividend yield: Dividend yield = DPS ÷ Market price × 100; Falls when the price rises, if DPS is unchanged.
Dividend payout ratio: Payout ratio = DPS ÷ EPS × 100; Retention ratio = 1 − payout ratio.
Market capitalisation: Market cap = Market price × Shares outstanding; Value of equity only, not debt.
Enterprise value: EV = Market cap + Total debt − Cash and cash equivalents; Debt minus cash is net debt. Some definitions also add minority interest and preference capital.
EV/EBITDA: EV/EBITDA = Enterprise value ÷ EBITDA; Numerator is whole-firm value, so the denominator must be a pre-interest measure.

How to solve Equity Valuation Ratios and Terms questions

Use this method for any question on valuation terms.

1Read what is asked: a ratio value, a comparison, or an interpretation.
2Write down the formula before touching numbers.
3Check units. Convert crore, lakh and per-share figures to the same basis.
4Find the inputs. If the question gives total profit and shares, compute EPS first.
5Calculate step by step and keep the intermediate values.
6For EV/EBITDA, build EV first: market cap plus debt minus cash.
7Match your result to the options. Reject options that are clearly a different ratio, such as the inverse.
8Interpret only as far as the question asks. Say high or low relative to peers, not good or bad.

Quickest way: Link ratios through EPS and price

When to use it: When you have price, EPS and DPS and need several ratios fast.

Compute EPS or take it from the question.
P/E is price ÷ EPS. Dividend yield is DPS ÷ price. Payout is DPS ÷ EPS.
Use the shortcut: yield × P/E = payout ratio. This checks your answers.
For market-level versions, use totals: market cap ÷ net profit gives P/E.
Eliminate options by sign and size first, then calculate only if two remain.

Common mistakes in Equity Valuation Ratios and Terms

Using market cap instead of enterprise value in the EV/EBITDA numerator.
Both are called value and the names look alike.
Fix: EV/EBITDA always uses EV. Market cap ÷ EBITDA is wrong because EBITDA is earned before paying lenders.
Inverting P/E, giving EPS ÷ price.
Students mix up price and earnings positions.
Fix: Price is on top for P/E and P/B. EPS ÷ price is earnings yield.
Computing book value per share from total assets.
Book value sounds like value of everything the company owns.
Fix: Use net worth, which is assets minus liabilities, equal to share capital plus reserves.
Calling dividend payout ratio the same as dividend yield.
Both involve dividends.
Fix: Payout divides DPS by EPS. Yield divides DPS by price.
Subtracting debt instead of adding it when finding EV.
Students link net with subtraction.
Fix: EV = market cap + debt − cash. Debt increases the value of the business claim.
Concluding that a low P/E or low P/B always means undervalued.
Textbook rules of thumb get treated as laws.
Fix: A low ratio may reflect weak growth or low returns. Compare with peers and the company's own history.

Worked examples

Example 1

A company has net profit of ₹120 crore, no preference shares and 6 crore equity shares. Its share price is ₹1,800 and it pays a dividend of ₹18 per share. Find EPS, P/E, dividend yield and payout ratio.

Show the solution

EPS = ₹120 crore ÷ 6 crore shares = ₹20.
P/E = 1,800 ÷ 20 = 90.
Dividend yield = 18 ÷ 1,800 × 100 = 1%.
Payout ratio = 18 ÷ 20 × 100 = 90%.
Check: yield × P/E = 0.01 × 90 = 0.9, which is the payout ratio.

Answer: EPS ₹20, P/E 90 times, dividend yield 1%, payout ratio 90%.

Example 2

A company has 10 crore shares at ₹250 each. It has debt of ₹800 crore and cash of ₹300 crore. Its EBITDA is ₹300 crore. Net worth is ₹1,250 crore. Find market cap, EV, EV/EBITDA and P/B.

Show the solution

Market cap = 250 × 10 crore = ₹2,500 crore.
Net debt = 800 − 300 = ₹500 crore.
EV = 2,500 + 500 = ₹3,000 crore.
EV/EBITDA = 3,000 ÷ 300 = 10 times.
Book value per share = 1,250 crore ÷ 10 crore = ₹125.
P/B = 250 ÷ 125 = 2 times.

Answer: Market cap ₹2,500 crore, EV ₹3,000 crore, EV/EBITDA 10 times, P/B 2 times.

Exam tips

Learn each formula with price on top for P/E and P/B, and DPS over price for yield. Many wrong options are inverted forms.
Check for preference dividends and for whether debt and cash are given. These change EPS and EV.
Wrong answers cost 25% of the question's marks in this exam, so eliminate options before guessing.
Expect interpretation questions. Know that EV/EBITDA is capital-structure neutral and P/B suits banks and asset-heavy firms.
Check the units in crore versus per share before dividing.

Practice questions from Terminology in Equity and Debt Markets

Equity Valuation Ratios and Terms: frequently asked questions

What is the difference between P/E and P/B ratio?

P/E compares price with earnings per share, so it reflects profitability. P/B compares price with book value per share, so it reflects balance sheet net worth. P/B is often used for banks and asset-heavy companies.

How do you calculate EV/EBITDA?

First find enterprise value: market cap plus debt minus cash. Then divide EV by EBITDA. For example, EV of ₹3,000 crore and EBITDA of ₹300 crore gives 10 times.

What is the formula for dividend yield and payout ratio?

Dividend yield is dividend per share divided by market price. Payout ratio is dividend per share divided by EPS. Yield relates dividend to price, while payout relates it to earnings.

Does a high P/E always mean a stock is overvalued?

No. A high P/E can reflect strong expected growth. You should compare it with peers and the company's own history before drawing a conclusion.