Deep dive · Ratios in practice

When the numbers seem to disagree

A company with losses and a soaring price. Profits up and the P/E down. ROE of 30% and ROCE of 12%. These puzzles come up all the time. Each section below explains the mechanics with made-up round numbers, and lists what to check next. None of it says whether a price is right.

On this page

ROE vs ROCE
Losses, yet a high price
High returns, yet a low price
Earnings up, P/E down
Sales up 10%, profit up 70%
One-off gains in profit
Profit up, cash down
When numbers disagree: a checklist

ROE vs ROCE: same business, different stories

In one lineROCE measures how well the whole business uses all the money in it, borrowed or not. ROE measures what is left for shareholders after lenders are paid. Borrowing can push ROE far above ROCE, in both good and bad years.

ROE = net profit ÷ average shareholders' equity × 100

ROCE = (profit before tax + interest) ÷ (equity + total debt) × 100

ROCE looks at profit before interest and tax, so it does not care how the business is financed. ROE looks at net profit, after interest and tax, divided by the owners' money only. That difference is the whole story. Take two identical businesses, each with ₹1,000 crore of capital and ₹200 crore of operating profit. A is funded entirely by its owners. B is funded with ₹400 crore of equity and ₹600 crore borrowed at 10%. Tax is 25%, and equity is the same at the start and end of the year, so average equity equals equity.

Illustrative example: a normal year

	A (no debt)	B (60% debt)
Operating profit	₹200 cr	₹200 cr
Interest	₹0	₹60 cr
Profit before tax	₹200 cr	₹140 cr
Net profit (after 25% tax)	₹150 cr	₹105 cr
ROCE	20%	20%
ROE	15%	26.3%

Same business, same ROCE. B earns less profit in rupees, yet its ROE is far higher, because the profit is spread over a much smaller equity base.

Illustrative example: a bad year (operating profit falls to ₹80 crore)

	A (no debt)	B (60% debt)
Profit before tax	₹80 cr	₹20 cr
Net profit	₹60 cr	₹15 cr
ROCE	8%	8%
ROE	6%	3.8%

Now B's ROE is lower than A's. The interest bill stays at ₹60 crore whatever happens to profit. The rule: borrowing lifts ROE when ROCE is above the interest rate, and drags it down when ROCE is below it. Had operating profit fallen below ₹60 crore, B would have made a loss while A was still profitable.

Reading the two together

ROE well above ROCE usually points to borrowing. Check debt-to-equity before reading a high ROE as a sign of a strong business.
ROCE above ROE is normal for a company with little debt, because ROCE is measured before tax and ROE after it.
Both falling means the business itself is earning less on its capital. ROE falling while ROCE holds points to financing: more debt at a higher rate, or a larger equity base.

Other things that inflate ROE

Buybacks and large dividends shrink equity. The same profit over less equity gives a higher ROE, with no change in the business.
Past losses and write-offs also shrink equity, so a recovering company can show a high ROE on a small base.
Negative equity makes ROE meaningless. If accumulated losses exceed the capital put in, equity is negative. A loss divided by negative equity gives a positive number. A "ROE of 40%" can belong to a loss-making company. Always check that equity is positive.
Banks and lenders borrow as their business, so ROCE tells you little there. ROE is the common measure for them, read alongside how much they have lent and how many loans have gone bad.

Negative ROE and ROCE, yet a high share price

In one lineRatios describe last year's results. The price reflects what buyers and sellers think about future years. When the two point in opposite directions, the price is a bet on the future, and that bet can be wrong.

A loss-making company can trade at a high market value for several different reasons:

Spending to grow. A young company may spend heavily on marketing, technology or new capacity. Those costs hit profit now, and the hope is that revenue later outgrows them.
A turnaround already under way. ScripLens ratios use the latest annual results. If the recent quarters show a return to profit, the price may already reflect that while the annual ROE is still negative.
A one-off write-off. A large impairment (writing down an asset or an acquisition) can turn one year's profit negative without affecting the cash the business generates.
The bottom of a cycle. Steel, metals, chemicals and sugar companies often report losses when prices for their product are at their lowest. The share price may look past that low.
Speculation or excitement. A high price is not proof that anyone has done the sums. It may reflect a theme, a story or plain momentum.

Illustrative example: growth-stage losses

	FY24	FY25	FY26
Revenue	₹1,000 cr	₹1,400 cr	₹1,960 cr
Net profit	−₹300 cr	−₹150 cr	−₹40 cr
ROE	−30%	−17%	−5%

Every year shows a loss and a negative ROE. But revenue grew 40% a year and the losses shrank. A market value of ₹20,000 crore is a valuation of profits that have not yet been earned. If those profits arrive, the price may look justified in hindsight. If they do not, there is no current profit holding the price up. Both outcomes are possible.

What to check: is revenue growing? Are losses shrinking or widening? Is operating profit positive even if net profit is not? Is cash from operations positive? How much debt is there to carry the company through the losses? And how many years has "profit is coming" been the story? P/E is shown as "—" for a loss-making company, because there are no earnings to compare the price with.

High ROE and ROCE, yet a low or falling price

In one lineA high return on capital describes the past. A low valuation often means the market doubts those returns will last, or expects little growth from them.

The peak of a cycle. A commodity producer can earn a 35% ROCE when prices are high. If the market expects prices to fall, it will not pay much for earnings it sees as temporary.
Little room to grow. A business can earn high returns on its capital but have few places to invest more. It pays out most of its profit, profit grows slowly, and the market pays less per rupee of profit for slow growth than for fast growth.
A threat to the returns. New competition, a regulation change, a price cap or a patent expiry can reduce future returns before they show up in reported figures.
The returns come from borrowing (see ROE vs ROCE above) or from one-off gains (see below).
Trust and governance. Concerns about accounting, related-party deals, promoter pledges or a controlling shareholder whose priorities may differ from other shareholders' can weigh on valuations regardless of returns.

Illustrative example: two high-return companies

	Company D	Company E
ROE	30%	18%
Profit growth, last 5 years	2% a year	22% a year
Share of profit paid out	90%	20%
P/E	11	45

D earns higher returns but pays nearly all of it out and barely grows. E earns less on its capital but reinvests most of its profit and grows fast. A higher ROE does not mean a higher P/E. The P/E reflects what people think about future profit, and growth is a large part of that.

Earnings went up, but the P/E went down

In one lineP/E is price divided by earnings. If earnings rise faster than the price, the P/E falls, even while the price is going up. A lower P/E after a profit jump says the market is paying less for each rupee of profit. It does not say the stock is a bargain.

P/E = market cap ÷ latest annual net profit (the same as price ÷ EPS)

Illustrative example: the mechanics

	Last year	This year	Change
Share price	₹500	₹560	+12%
EPS	₹25	₹35	+40%
P/E	20	16	−20%

The price rose 12%. Earnings rose 40%. The P/E is the ratio of the two, so it fell. This is called a de-rating: the market now pays ₹16 for each rupee of yearly profit, down from ₹20.

Why would the market pay less per rupee of profit after profit has grown?

The jump looks temporary. A one-time gain, a tax refund or a short-lived spike in product prices can lift a single year. The market discounts profit it does not expect to repeat.
Growth is expected to slow. A company growing at 40% is often valued for that growth continuing. If the market thinks the next few years will be slower, it pays less for each rupee now.
Interest rates went up. When safe deposits pay more, investors pay less for future profits in general. P/E levels across the whole market tend to fall.
The profit is not turning into cash. See profit vs cash below.
A timing quirk. ScripLens P/E uses the latest annual profit while the price changes every day. On the day new annual results are loaded, the P/E can drop sharply even if the price has not moved.

The cyclical paradox: low P/E at the peak, high P/E at the bottom

Illustrative example: a steel company through a cycle

	Boom year	Bust year
EPS	₹100	₹10
Share price	₹600	₹300
P/E	6	30

In the boom the P/E looks very low, because profit is at its highest and the market does not expect it to last. In the bust the P/E looks very high, because profit has nearly vanished while the price fell less. For cyclical companies, a single year's P/E can point the opposite way from what it seems to say. Compare profit over a full cycle, not one year.

The reverse also happens: profit falls, but the price falls less (or rises) because the market sees the dip as temporary, and the P/E goes up. A low P/E is not automatically a bargain, and a high P/E is not automatically expensive. See the low P/E myth.

Try it yourself: move price and earnings and watch the P/E change →

Sales up 10%, profit up 70%: operating leverage

In one lineWhen a large share of costs is fixed (rent, salaries, plant), a small change in sales becomes a large change in profit, in both directions.

Illustrative example: fixed costs at work

	Sales −10%	Base year	Sales +10%
Revenue	₹900 cr	₹1,000 cr	₹1,100 cr
Variable costs (30% of revenue)	₹270 cr	₹300 cr	₹330 cr
Fixed costs	₹600 cr	₹600 cr	₹600 cr
Profit	₹30 cr	₹100 cr	₹170 cr
Profit change	−70%		+70%

A 10% move in sales gives a 70% move in profit. That is why profit growth swings much more than revenue growth for airlines, hotels, cement makers and software companies with large fixed teams. A big jump in profit growth can simply mean sales recovered from a weak year (the base effect), and the same leverage works just as hard on the way down.

One-off gains hiding in profit

In one lineNet profit includes everything: sale of land, a stake sale, a tax write-back, interest on spare cash. A ratio built on an unusually high profit looks better than the business behind it.

Illustrative example: an asset sale

	Last year	This year
Operating profit	₹100 cr	₹100 cr
Gain on sale of land	—	₹80 cr
Net profit (after tax)	₹75 cr	₹135 cr
Profit growth		+80%
P/E at a ₹1,500 cr market cap	20	11

The core business did not change, yet profit growth reads +80% and the P/E nearly halved. Next year, with no land to sell, profit returns to about ₹75 crore and the P/E returns to about 20 at the same price. Compare operating profit with net profit. If net profit jumps while operating profit is flat, look for an exceptional item in the company's results.

Profit up, cash from operations down

In one lineProfit is an accounting figure, booked when a sale is made. Cash arrives when the customer pays. The two can drift apart for a while, and a gap that persists is worth understanding.

Illustrative example: sales on credit

A company books ₹1,000 crore of sales and ₹100 crore of profit. But customers have paid only ₹850 crore so far, and the company built up ₹50 crore of extra stock.

Profit: +₹100 crore. Cash from operations: roughly ₹100 − ₹150 (unpaid bills) − ₹50 (extra stock) = −₹100 crore.

One year of this can be ordinary timing: a large order shipped in March and paid for in April. Several years of profit with little or no cash from operations is different. It can mean customers are slow to pay, stock is piling up, or profits are being recognised early. The stock page's Financials table shows cash from operations next to net profit, so the comparison takes one glance.

When numbers disagree: a checklist

In one lineMost puzzles come from one of a few causes. Work through them before concluding that a price or a ratio is wrong.

Which year? Ratios use the latest annual results, and the price is today's. Check the quarterly figures for anything newer.
One-offs? Compare operating profit with net profit. A gap points to exceptional items.
Debt? Compare ROE with ROCE, and look at debt-to-equity.
Equity positive? If not, ROE and P/B are meaningless.
Cash? Compare cash from operations with net profit over several years.
Cycle? For commodity and cyclical businesses, look at profit across a full cycle, not one year.
Peers? Compare with similar companies in the same sector, using the same standalone or consolidated basis.
Several years? One year of any ratio is a snapshot. Five years show a pattern.

Even after all of this, the market price can stay out of line with the numbers for a long time, in either direction. These checks explain what a figure means. They cannot say what a price will do next. The formulas behind each ratio are in Level 2: Company ratios.

Myths and thinking traps →

Educational explanations only, not investment advice, research or a recommendation to buy, sell or hold any security. Past performance does not indicate future results. Every example uses made-up round numbers. Read the Disclaimer before relying on any figure.