Which financial ratios are important for NISM Series XV?

Key ratios include profitability (ROE, ROCE, net margin), liquidity (current, quick), leverage (debt-equity, interest coverage), efficiency (asset turnover) and valuation multiples (P/E, P/B, EV/EBITDA).

What does a high P/E ratio mean?

A high P/E means the market is paying a premium per rupee of earnings, usually reflecting high growth expectations — but it can also signal overvaluation. Always compare P/E with peers and the company's own history.

Financial Ratios Every Research Analyst Must Know (NISM XV)

Financial ratios turn a company's raw financial statements into insight — and they are heavily tested in the NISM Series XV exam. This guide covers the essential ratios every research analyst must know, grouped by what they measure, with formulas and plain-English meaning.

Why ratios matter

A balance sheet and P&L are just numbers until you put them in context. Ratios let you compare a company across time and against peers — measuring profitability, financial health, efficiency and valuation in a standard way.

1. Profitability ratios

These measure how efficiently a company turns revenue and capital into profit.

Net Profit Margin = Net Profit / Revenue. How much of each rupee of sales becomes profit.
Return on Equity (ROE) = Net Profit / Shareholders' Equity. Profit generated on owners' funds. A favourite exam ratio.
Return on Capital Employed (ROCE) = EBIT / Capital Employed. Returns on all long-term capital (equity + debt).

Higher is generally better, but always compare with industry norms.

2. Liquidity ratios

These measure the ability to meet short-term obligations.

Current Ratio = Current Assets / Current Liabilities. A ratio around 1.5–2 is often considered healthy.
Quick Ratio (Acid Test) = (Current Assets − Inventory) / Current Liabilities. A stricter test that excludes inventory.

3. Leverage (solvency) ratios

These measure how much debt a company carries.

Debt-to-Equity = Total Debt / Shareholders' Equity. Higher means more financial risk.
Interest Coverage = EBIT / Interest Expense. How comfortably profits cover interest. Below ~1.5 is a warning sign.

4. Efficiency (activity) ratios

These show how well a company uses its assets.

Asset Turnover = Revenue / Total Assets. Revenue generated per rupee of assets.
Inventory Turnover = COGS / Average Inventory. How fast inventory is sold. A falling ratio can signal weak demand.

5. Valuation ratios (market multiples)

These link price to fundamentals — central to the valuation chapter.

P/E (Price-to-Earnings) = Price per Share / EPS. Price paid per rupee of earnings.
P/B (Price-to-Book) = Price per Share / Book Value per Share. Price relative to net assets.
EV/EBITDA = Enterprise Value / EBITDA. A capital-structure-neutral valuation multiple.

Worked example: If EPS is ₹15 and the P/E is 20, the market price = P/E × EPS = ₹300. Reverse the formula to find any missing piece.

How to interpret ratios (the analyst's mindset)

A ratio in isolation means little. Always:

Compare with peers — is ROE high for this industry?
Compare over time — is the trend improving or deteriorating?
Cross-check — high ROE driven by high debt is riskier than ROE driven by margins.

This comparative thinking is exactly what the NISM Research Analyst exam tests in its case-study questions.

Tips for the exam

Memorise the formulas — many questions simply test the formula or a one-step calculation.
Know what "good" looks like — e.g. higher ROE/ROCE, comfortable interest coverage.
Practise numerical questions until calculations are quick and automatic.

Drill ratio and valuation questions on ScoreSetu — each one comes with a worked explanation. For the bigger picture, see our guide to DCF valuation for NISM XV.

Master these financial ratios and you will handle both the calculation and the interpretation questions that make up a big share of the NISM Series XV marks.