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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