NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Investing in Stocks (NISM XXI-A)

Fundamental Analysis and Valuation Ratios for NISM PMS Distributors

Updated 11 October 2026 · Fact-checked

Fundamental analysis estimates what a share is really worth by studying the economy, the industry and the company's financial statements. You then compare that value with the market price using ratios such as P/E, P/B, ROE and dividend yield. A share priced well below its estimated value may be undervalued.

Understand Fundamental Analysis and Valuation Ratios

Fundamental analysis asks one question: what is this business worth, and is the market price fair? The answer comes from facts about the economy, the industry and the company, not from price charts.

There are two ways to organise the work. In the top-down approach you start with the economy (growth, inflation, interest rates), move to the best industries, and then pick companies within them. In the bottom-up approach you start with a single company and judge its business, management and financials, giving less weight to the wider picture. Many investors mix both.

Company analysis relies on financial statements: the balance sheet (what the company owns and owes), the profit and loss account (income and expenses over a period) and the cash flow statement. Ratios turn these numbers into comparable measures. EPS shows profit per share. ROE shows how well the company uses shareholders' money. P/E and P/B compare the market price with earnings and with book value. Dividend yield shows the cash return from dividends against the price.

No ratio works alone. A low P/E may signal a bargain, or it may signal a weak business. Compare a ratio with the company's own history, with peers in the same industry, and with the market. Ratios of companies in very different industries are not directly comparable.

For a PMS distributor, this matters because you must understand how a portfolio manager picks stocks and be able to explain the approach to clients in plain words.

Key formulas to remember

Earnings per share (EPS): EPS = (Net profit after tax − Preference dividend) ÷ Number of equity shares outstanding; Use profit available to equity shareholders. Without preference shares, it is just net profit ÷ shares.
Price-to-earnings ratio (P/E): P/E = Market price per share ÷ EPS; Shows how many rupees investors pay for each ₹1 of earnings. Compare within the same industry.
Earnings yield: Earnings yield = EPS ÷ Market price × 100 = 1 ÷ P/E × 100; The inverse of P/E, shown as a percentage.
Book value per share: Book value per share = Net worth (shareholders' funds) ÷ Number of equity shares; Net worth is equity share capital plus reserves.
Price-to-book ratio (P/B): P/B = Market price per share ÷ Book value per share; Often used for banks and asset-heavy companies.
Return on equity (ROE): ROE = Net profit after tax ÷ Shareholders' equity × 100; Measures profit earned on shareholders' money. Higher is generally better, but check debt levels.
Dividend yield: Dividend yield = Dividend per share ÷ Market price per share × 100; Uses the annual dividend per share and the current price.
Dividend payout ratio: Payout ratio = Dividend per share ÷ EPS × 100; The share of earnings paid out as dividends. The rest is retained.

How to solve Fundamental Analysis and Valuation Ratios questions

Use this method for any question on fundamental analysis or valuation ratios.

1Read what is asked: a concept (top-down, bottom-up, which ratio) or a calculation.
2For a concept question, match the keyword. Economy first means top-down. Single company first means bottom-up.
3For a calculation, write down the formula before putting in numbers.
4Check the units. Make sure profit, equity and share count match, for example crore versus number of shares.
5Compute step by step. Find EPS or book value per share first if the ratio needs it.
6Convert to a percentage where the ratio is a yield or return (ROE, dividend yield).
7Check that the answer is sensible and matches exactly one option. Watch for options built from the wrong formula.

Quickest way: Formula-first elimination

When to use it: Use this for ratio calculations when time is short and the options look close.

Identify the ratio and say its formula to yourself: price over something, or something over equity.
Compute only the needed pieces. P/E needs price and EPS. P/B needs price and book value per share.
Estimate roughly first (round numbers) to remove options that are far off.
Check the unit: P/E and P/B are plain numbers (times), ROE and yields are percentages.
Pick the option that matches your exact figure, not the one built by inverting the ratio.

Common mistakes in Fundamental Analysis and Valuation Ratios

Confusing top-down with bottom-up
The names sound alike and students guess from the direction of the words.
Fix: Top-down starts at the economy and ends at the company. Bottom-up starts at the company. Link top to the biggest picture.
Inverting P/E or dividing earnings by price and calling it P/E
Students forget which quantity is on top.
Fix: P/E has price on top. Earnings divided by price is earnings yield.
Using total profit instead of EPS in P/E
Both are earnings figures and the question may give total profit.
Fix: Divide net profit by the number of shares first. Then divide price by that EPS.
Calling a low P/E or P/B always a bargain
Students treat ratios as rules rather than clues.
Fix: A low ratio may reflect weak growth or high risk. Compare with peers and history before concluding.
Mixing up ROE with dividend yield
Both are percentages and both relate to shareholders.
Fix: ROE is profit over equity (company performance). Dividend yield is dividend over price (cash return to an investor).
Using face value instead of market price for yield and P/E
Face value appears in the question as a distractor.
Fix: Valuation ratios use the current market price. Face value is only the nominal value of the share.

Worked examples

Example 1

A company has net profit of ₹50 crore, no preference shares and 10 crore equity shares. Its market price is ₹300 per share. Its net worth is ₹250 crore. Find EPS, P/E and P/B.

Show the solution

EPS = ₹50 crore ÷ 10 crore shares = ₹5.
P/E = 300 ÷ 5 = 60.
Book value per share = ₹250 crore ÷ 10 crore shares = ₹25.
P/B = 300 ÷ 25 = 12.

Answer: EPS is ₹5, P/E is 60 times and P/B is 12 times.

Example 2

A company earns a net profit of ₹24 crore on shareholders' equity of ₹120 crore. It has 6 crore shares, pays a dividend of ₹2 per share, and the market price is ₹80. Find ROE, dividend yield and payout ratio.

Show the solution

ROE = 24 ÷ 120 × 100 = 20%.
Dividend yield = 2 ÷ 80 × 100 = 2.5%.
EPS = 24 ÷ 6 = ₹4.
Payout ratio = 2 ÷ 4 × 100 = 50%.

Answer: ROE is 20%, dividend yield is 2.5% and the payout ratio is 50%.

Exam tips

Expect both definition questions (top-down versus bottom-up, what a ratio measures) and short calculations. Learn the formulas exactly.
Check the negative marking for your exam: XXI-A deducts 10% of the marks of a question for a wrong answer, so skip only if you cannot narrow down the options.
Trap options often use the inverse of the right ratio or the wrong base (face value, total profit). Re-read what sits on top of the fraction.
Remember that ratios are compared within an industry. Questions often test that cross-industry comparison is misleading.
Be ready to say what each ratio tells you in one line, as scenario questions test interpretation.

Practice questions from Investing in Stocks (NISM XXI-A)

Fundamental Analysis and Valuation Ratios in other exams

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

Fundamental Analysis and Valuation Ratios: frequently asked questions

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

P/E compares the share price with earnings per share. P/B compares the share price with book value per share. P/E focuses on profit, while P/B focuses on the net assets on the balance sheet.

What is the difference between top-down and bottom-up investing?

Top-down starts with the economy, then picks industries and then companies. Bottom-up starts with an individual company and judges it on its own merits. Both aim to find fairly priced or undervalued shares.

How do you calculate ROE and EPS?

EPS is net profit available to equity shareholders divided by the number of equity shares. ROE is net profit divided by shareholders' equity, multiplied by 100. For example, a profit of ₹10 crore on equity of ₹100 crore gives an ROE of 10%.

Is a high P/E ratio good or bad?

It is neither by itself. A high P/E can mean investors expect strong growth, or that the share is expensive. Compare it with peers and the company's own history.