In Day 2, we covered the difference between investing and speculation, market cap categories, and how to build a 5-stock practice watchlist.
Open Your Free Demat Account Online Today, we look at the core numbers behind every business: how to read a company's basic financials and verify if it is actually making real money.
Why Company Numbers Matter
You do not need an accounting degree or complex finance background to evaluate a company. You only need to understand three core numbers, just like judging whether a local restaurant is running well or struggling.
Think of any small restaurant in your area:
- How much money comes in from customers every month?
- After paying for ingredients, rent, staff salaries, and electricity, how much stays in the owner's pocket?
- Out of every 100 Rupees earned, how many Rupees turn into actual profit?
These three simple questions match the most vital numbers in a company's financial report.
The Big 3 Financial Numbers Every Beginner Must Know
1. Revenue (Sales / Topline)
Revenue is the total money a company brings in from selling products or services, before deducting any expenses.
Restaurant Example: If a restaurant sells 500 meals in a month at 400 Rupees each, total revenue is 2,00,000 Rupees. This is gross cash collected, not profit.
Why It Matters: Consistent revenue growth year over year shows that demand for the company's products is healthy and expanding.
2. Net Profit (Bottomline)
Net profit is what remains after deducting all expenses: raw materials, wages, operating costs, loan interest, and government taxes.
Restaurant Example: From the 2,00,000 Rupees collected, the restaurant pays all operating bills. Whatever remains in the bank account at the end of the month is net profit.
Why It Matters: A company can show massive revenue and still lose money if expenses are out of control. Net profit proves whether the business model actually works.
3. Profit Margin
Profit margin measures what percentage of total revenue converts into actual take-home profit.
Formula in Plain Words: Profit Margin = (Net Profit divided by Revenue) multiplied by 100
Restaurant Example: If the restaurant makes 2,00,000 Rupees in sales and keeps 20,000 Rupees as net profit, the profit margin is 10 percent.
Why It Matters: A higher margin means the business has pricing power and manages costs efficiently, rather than surviving on thin, risky margins.
Understanding P/E Ratio Without Confusing Math
Price-to-Earnings (P/E) Ratio is one of the most popular stock market metrics, but it is simple once understood:
In Plain Words: P/E Ratio tells you how much money investors are paying today for every 1 Rupee of company profit.
Analogy: If an entire business earns 1 Lakh Rupees annually in profit, and someone offers to sell it for 15 Lakh Rupees, the P/E ratio is 15. You are paying 15 times its annual earnings.
High P/E vs Low P/E: What It Really Means
- High P/E: Investors expect the company to grow profits rapidly in the future, so they are willing to pay a premium today.
- Low P/E: Either the stock is undervalued, or the business is facing serious problems and profits are expected to drop. A stock that looks cheap but has declining profits is often called a value trap.
Rule of Thumb: Never buy a stock solely because its P/E looks low, and never avoid one solely because its P/E looks high. Context matters.
The Industry Comparison Rule
A P/E ratio by itself tells very little. It must always be compared against companies in the same sector.
For instance, comparing a software company's P/E to a manufacturing company's P/E is not helpful because their operating costs and business models are completely different. Always compare a company's valuation with other businesses in its own industry.
Red Flags to Spot Instantly
Before adding any company to your final portfolio, check for these warning signs:
- Declining Profits: Net profits shrinking continuously over 3 or more years while sales remain flat.
- Excessive Borrowing: Debt rising every year while operating profit fails to keep pace.
- High Promoter Pledging: Company founders pledging their own shares as collateral for loans. Heavy pledging creates sharp downside risks.
- One-Off Profit Spikes: Sudden profit jumps caused by selling land or assets, rather than regular business sales.
How to Check Financials on Screener.in in 2 Minutes
1. Visit Screener.in and type any large-cap company name in the search bar.
2. Scroll to the Profit & Loss table to view sales and profit performance over the past 5 to 10 years.
3. Check the Sales row to confirm steady upward movement over time.
4. Check the Net Profit row to ensure earnings are expanding steadily without wild swings.
5. Check the current P/E Ratio displayed near the top summary and compare it with the industry peers listed on the same page.
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Today's Summary
- Revenue represents total money collected from sales.
- Net Profit is what the company keeps after paying all expenses and taxes.
- Profit Margin shows how efficiently sales turn into profit.
- P/E Ratio indicates valuation—how much you pay for every 1 Rupee of profit.
- Always compare financial metrics within the same industry sector.
Coming Up in Day 4: Dividends and How Investors Actually Make Money—how payouts work and how dividend-yielding stocks fit into a long-term plan.
Disclaimer: This guide is strictly for educational purposes and does not constitute financial, investment, or trading advice. Company examples are illustrative only. Please consu
lt a SEBI-registered advisor before investing. Investments in securities are subject to market risks.
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