#722

Описание: In the last episode, we walked into a simple neighbourhood bakery to understand how its business works—sales, profits, costs, and debt.


Today, we’re standing outside that same bakery again, but with a new question.






Not “Is this a good business?”


But “Is this business priced fairly?”






This is where many beginners get confused. They see a stock price and wonder:


Is it expensive?


Is it cheap?


Why does something that looks “costly” still perform well?






To answer this, we’ll use five basic ratios—EPS, P/E, P/B, Debt-to-Equity, and ROE—and apply them to our bakery example. These ratios help bridge the gap between business quality and market price.






Business vs Price






A strong business and a good investment aren’t always the same.


Imagine two identical bakeries—same customers, same profits, same growth. But one is priced at ₹1 crore and the other at ₹10 crore.


Nothing changed inside the bakery—only the price.


Valuation helps us understand that difference.






EPS – Earnings Per Share






EPS simply tells you how much profit belongs to one share.


If the bakery earns ₹10 lakh and has 1 lakh shares, EPS is ₹10.


Rising EPS means growing profits, but EPS alone doesn’t tell you whether the stock is worth buying.






P/E – Price for Earnings






If EPS is ₹10 and the share price is ₹100, the P/E is 10.


You’re paying ₹10 for every ₹1 of earnings.


A higher P/E isn’t always bad—it may reflect expectations of future growth. P/E works best when compared with past values or similar businesses.






P/B – Price vs Net Worth






P/B compares market value with the bakery’s net assets.


If net worth is ₹50 lakh and market value is ₹100 lakh, P/B is 2.


Below 1 means undervaluation; above 1 means the market expects better returns.






Debt-to-Equity






This shows how much the bakery relies on borrowing.


Debt isn’t bad if profits grow with it—but risky if they don’t.






ROE – Return on Equity






ROE tells you how well the bakery uses the owner’s money.


If ₹50 lakh earns ₹10 lakh, ROE is 20%.


High and consistent ROE signals efficiency—but always check debt alongside it.


Closing


Every stock price reflects how the market values a business today.


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