Five ratios to compare two companies side by side, explained

A fund manager whose fund owns Sameer Chai shares has sent one blunt question: "Why should I hold you and not the older chain?" Sameer forwards it to Riya with no comment, which for him is a comment.

The rival, in words

The rival is an older listed chai chain. It grows slowly. It owns most of its shops and borrowed to buy them. It pays out most of its profit as dividends, and its share price has barely moved in years. We won't give it numbers. For this exercise, "higher" or "lower" is enough.

The five rows

Our figures are standalone. The rival's direction words assume we're reading the same kind of numbers for it. Hold on to that: it's the first trap at the end.

Row 1, the P/E ratio

What it says. How many rupees buyers pay today for one rupee of yearly profit. Ours is 30.

What "good" depends on. Expected growth, mostly. A high P/E means buyers expect profit to rise. A low one can mean slow growth expected, or worries, or simply a bargain. The ratio alone can't tell you which.

Side by side. The rival's lower P/E fits a business the market expects to grow slowly. Ours says buyers expect the new kiosks to pay off. If they don't, a P/E of 30 has a long way to fall.

Row 2, ROE

What it says. Profit as a share of the owners' money. Ours is about 8.2%. A bank deposit isn't far off that.

What "good" depends on. How the money is used, and how much of it is borrowed. Two things push ROE around that have nothing to do with how good the chai is.

• Idle cash drags it down. About ₹55 crore of our ₹110 crore of equity sits in the bank, left over from the IPO. Our books show no income from it. As a rough check, our ₹9 crore of profit against the other ₹55 crore is about 16.4%. That's not an official figure, just a way to see how much the idle cash weighs.
• Debt pushes it up. Borrowing shrinks the equity you divide by, so ROE rises even if the business is no better.

Side by side. The rival's higher ROE comes partly from its debt. Ours is low partly because the IPO money hasn't been spent yet. In the annual report, the ratios note uses average equity for the year, so the printed figure can differ a little from a simple year-end sum.

Row 3, debt-to-equity

What it says. Rupees borrowed for each rupee of owners' money. Ours is about 0.18: 18 paise of loans per rupee of equity.

What "good" depends on. The industry. A business that owns shops, factories or power plants usually borrows more than one that rents kiosks. What counts as "debt" also varies. Some companies include lease liabilities, some don't. The annual report's ratios note tells you what went into the sum.

Side by side. The rival borrowed to buy its shops, so its ratio is much higher. That means interest it must pay in good months and bad. It also explains its ROE in row 2. These two rows are one story.

Row 4, the current ratio

What it says. What turns into cash within a year, divided by what's due within a year. Ours is about 4.3.

What "good" depends on. How fast customers pay. Chai is paid for the moment it's poured, and suppliers give weeks of credit. So a chai chain can run a current ratio below 1 without any trouble.

Side by side. The rival's below-1 ratio looks scary and may be perfectly normal. Ours looks very safe, but take out the ₹55 crore of cash and it's 10 ÷ 15, about 0.67, much like a normal chai business. Our 4.3 is the same idle IPO cash from row 2, showing up again.

Row 5, dividend yield, with the payout ratio

What it says. The yearly dividend as a percentage of today's share price. Ours is about 0.93%.

What "good" depends on. The price, for a start. The price is the bottom of the sum, so if it falls, the yield rises. A high yield can mean a generous company or a falling share. To tell them apart, read it next to the payout ratio: the share of profit paid out. Ours is about 28% (₹2.5 crore of ₹9 crore). We keep the other 72% to build kiosks.

Side by side. The rival pays out most of its profit, so its payout ratio and its yield are both higher. That suits a company with more cash than plans. A growing one usually keeps more back.

Read the five as one story

Now step back from the rows.

• Sameer Chai: a high P/E, a low ROE, little debt, a big current ratio and a small dividend. That's one story: a young company sitting on unspent IPO cash, and a market betting it will grow into it.
• The rival: a lower P/E, a higher ROE, heavy debt, a thin current ratio and a big dividend. Also one story: a mature company that borrowed to own its shops and now hands most of its profit back.

Neither set is "better". They answer different questions. A fund manager who wants growth and a fund manager who wants steady dividends would read the same table and reach different answers.

Three traps when you compare

1. Standalone against consolidated. Make sure both companies' ratios come from the same kind of accounts. Our standalone EPS is ₹1.80, so the P/E is 30. Our consolidated profit is ₹9.5 crore with the premix subsidiary added in, which makes EPS ₹1.90 (9.5 ÷ 5) and the P/E about 28.4 (54 ÷ 1.90). Put one company's standalone P/E next to another's consolidated one and you've compared two different things.

2. Different years. Check that both sets of ratios cover the same period. A rival's ratios from last year's annual report, set against our latest, compare two different years. Websites that show a "trailing" P/E use the last four quarters, not the financial year, so their number can differ from the annual report's. A few Indian companies also close their books on a date other than 31 March. Line up the dates before you line up the ratios.

3. One-off profits. A company that sold a property makes a lot more profit that year. Its EPS rises, so its P/E looks low and its ROE looks high, for one year only. Look for "exceptional items" in the profit and loss statement before you trust either ratio. Our FY26 profit is all from chai: there's no other income and no one-off.

One more habit helps with all three. Schedule III makes companies list key ratios in their annual report notes, say what goes into each sum, and explain any ratio that moved by more than 25% from the year before. When you compare two companies, read both ratios notes first. You'll often find the difference is in the recipe, not the business.