9 Simple Ratios Every Great Investor Uses - Buffett Included!Forget the hype, headlines, or hope. These 9 financial ratios are what real investors actually use to pick winners, but...
P/E? ROE? EPS? 🧐
- What are they, or better yet, WHO are they? 🤯
- How high is “too high”?
- Is a low number always good, or just a trap?
- Do all industries follow the same rules… or is that another myth?
Buffett. Greenblatt. Graham. Lynch.
They didn’t rely on vibes — they trusted fundamentals
After years of relying on charts, I built a 9-point fundamentals checklist to filter stocks faster and smarter. Now I’m sharing it with real-life examples and key insights to help you spot what really makes a stock worth owning:
Easy enough for new investors diving into fundamentals
Sharp enough to level up seasoned pros
Real enough to avoid hype
…but the truth is: these numbers did flag companies like Amazon, Apple, and Nvidia before the market gave them credit.
-----------------------------------------------------
✅ Quick Reference Table
Scan the table, then dive into the stories…
First Pro Tip: Bookmark this. You’ll check these before every stock pick.
-----------------------------------------------------
📊 1. P/E Ratio | Price-to-Earnings
What it tells you: How much you pay for each dollar of a company’s profit.
Short Example: A P/E of 20 means you pay $20 for $1 of profit. High P/E? Expect big growth or risk overpaying.
Strong: Between 15 and 25
Caution: Above 30 (unless fast growth)
Industry Averages:
- Tech: 25–40
- Utilities: 10–15
- Consumer Staples: 15–20
- Energy: 10–20
- Healthcare: 20–30
Story: In early 2023, NVIDIA’s P/E ratio hovered around 25, near the low end for tech stocks. Investors who saw this as a steal amid the AI boom were rewarded—NVIDIA’s stock made 4x by the end of 2024 as AI chip demand soared.
Contrast that with Tesla in Q1 2025, when its P/E spiked above 40 with slowing sales and Tesla’s stock dropped 50% in weeks.
Pro tip: A low P/E is not always good. If growth is weak or falling, it's often a trap.
Example: A utility company with a P/E of 30 is probably overpriced. A tech stock with 35 might still be fair — if growth justifies it.
-----------------------------------------------------
🧠 2. PEG Ratio | Price-to-Earnings-to-Growth
What it tells you: If a high P/E is worth it based on future profit growth. Whether the earnings growth justifies the price.
Short Example: A PEG below 1 means you’re getting growth at a fair price. High PEG? You’re overpaying.
Strong: Below 1
Caution: Above 2
Industry Averages:
- Software: below 1.5 is solid
- Consumer Goods: Below 2 is more realistic
- Tech: Below 1
- Consumer Staples: Below 1.5
- Healthcare: Below 1.2
- Financials: Below 1.5
- Energy: Below 1.3
Story: In mid-2022, Salesforce’s PEG was 0.8 (P/E 35, forward EPS growth 45%) as cloud demand surged. Investors who spotted this steal saw the stock climb 130% by the end of 2024. Meanwhile, Peloton in 2023 had a P/E of 20 but near-zero growth (PEG above 3). Its stock cratered -50% as fitness trends faded.
Story: NVIDIA’s PEG hit 0.9 in Q3 2023 (P/E 30, growth 35%) during AI hype, a steal for tech (average PEG below 1.2).
PEG filters hype. A stock can look expensive until you factor in growth.
-----------------------------------------------------
🧱 3. P/B Ratio | Price-to-Book
What it tells you: How much you pay compared to what the company owns (like buildings or cash).
Short Example: A P/B below 1.5 means you’re paying close to the company’s asset value. High P/B? Expect strong profits or risk.
Strong: Below 1.5
Caution: Below 1 + poor earnings = value trap
Industry Averages:
- Banks: Below 1.5
- Insurance: Below 1.3
- REITs: Use NAV (aim below 1.2)
- Tech: Often ignored
- Energy: Below 2
Story: In 2024, JPMorgan Chase’s P/B was 1.4, solid for banks (average below 1.5). Investors who bought enjoyed 100% gains.
n 2023, Bed Bath & Beyond’s P/B fell below 1 with collapsing earnings. It looked cheap but filed for bankruptcy that year.
Tip: Only use this in asset-heavy sectors like banking or real estate.
-----------------------------------------------------
⚙️ 4. ROE | Return on Equity
What it tells you: How well a company turns investor money into profits.
Short Example: An ROE above 15% means the company makes good money from your investment. Low ROE? Weak returns.
Strong: Above 15%
Caution: Below 10% unless in slow-growth industries
Industry Averages:
- Tech: 20–30%
- Consumer Staples: 15–25%
- Utilities: 8–12%
- Financials: 10–15%
- Healthcare: 15–20%
Story: Coca-Cola (KO) has kept ROE above 35% for years, a sign of brand power and pricing strength.
Eli Lilly’s (LLY) ROE stayed above 25% from 2022–2024, a healthcare leader (average 15–20%). Its weight-loss drug Mounjaro drove consistent profits, lifting the stock 150%+ in two years. Checking ROE trends helped investors spot this winner.
Tip: If ROE is high but D/E is also high, be careful, it might just be leverage.
-----------------------------------------------------
💰 5. Net Margin | Profitability
What it tells you: How much profit a company keeps from its sales or what % of revenue ends up as pure profit.
Short Example: A 10% margin means $10 profit per $100 in sales. Low margin? Tough business or high costs.
Strong: Above 10-15%+
Caution: Below 5%
Industry Averages:
- Software: 20–30%
- Retail: 2–5%
- Manufacturing: 8–12%
- Consumer Staples: 10–15%
- Energy: 5–10%
- Healthcare: 8–15%
Story: Walmart’s (WMT) 2% net margin looks tiny — but it’s expected in retail.
A software firm with 5%? That’s a warning — high costs or weak pricing.
In 2023, Zoom’s (ZM) net margin fell to 5% (down from 25% in 2021), well below software’s 20–30% average. Pricing pressure and competition crushed its stock quite a lot. Meanwhile, Apple’s 25% margin in 2024 (tech average 20%) remained a cash cow.
Tip: Margins show whether the company owns its pricing or competes on price.
-----------------------------------------------------
💣 6. D/E Ratio | Debt-to-Equity
What it tells you: How much debt a company uses compared to investor money.
Short Example: A D/E below 1 means more investor cash than debt. High D/E? Risky if profits dip.
Strong: Below 1
Caution: Above 2 (except REITs or utilities)
Industry Averages:
- Tech: 0–0.5
- Industrials: 0.5–1.5
- REITs: 1.5–2.5 (manageable due to structure)
- Utilities: 1–2
- Energy: 0.5–1.5
Story: In 2024, Tesla’s D/E dropped below 0.3 (tech average 0–0.5) as it paid down debt, signaling strength despite sales dips - a massive rally afterward.
Tip: Rising debt + falling profits = a storm coming. Always check both.
-----------------------------------------------------
💵 7. Free Cash Flow (FCF)
What it tells you: Cash left after paying for operations and growth investments.
Short Example: Apple’s $100 billion cash pile in 2024 funded stock buybacks, boosting shares. Low cash? Trouble looms.
Strong: Positive and growing
Caution: Negative for multiple years
Sector notes:
- Tech: Lots of cash (think billions)
- Industrials: Up and down, check trends
- REITs: Look at FFO (cash from properties), aim high
- Energy: Has cash, but swings with oil prices
- Healthcare: Steady cash, not too high
Story: Netflix had negative FCF while scaling content. Once costs stabilized, FCF turned positive and stock re-rated sharply.
Pro tip: Profits don’t mean much without real cash. FCF is often more honest.
Cash is king: Companies need cash to pay bills, reduce debt, or fund growth. If FCF is falling, they might be burning through cash reserves or borrowing, which isn’t sustainable.
Potential issues : This mismatch could signal problems like poor cash collection, heavy spending, or even accounting tricks to inflate profits.
-----------------------------------------------------
🚀 8. EPS Growth | Earnings Power
What it tells you: How fast a company’s profits per share are growing.
Short Example: EPS up 10% yearly means more profit per share, lifting stock prices. Flat EPS? No growth, no gains.
Strong: Above 10%
Caution: Below 5%, flat/negative for 3+ years
Industry Averages:
- Tech: 15–30%
- Staples: 5–10%
- REITs: 3–6% (via FFO growth)
- Healthcare: 10–15%
- Financials: 5–10%
- Energy: 5–15% (cyclical)
Story: In Q1 2024, NVIDIA’s forward EPS growth of 30% (tech average 20%+) fueled a rally as AI chips dominated. Checking forward estimates helped investors avoid traps like Intel, with flat EPS and a drop.
Pro tip: A stock with flat EPS and no dividend? There’s no reason to own it.
-----------------------------------------------------
💵 9. Dividend Yield | Passive Income
What it tells you: How much cash you get yearly from dividends per dollar invested.
Short Example: A 3% yield means $3 per $100 invested. High yield? Check if it’s sustainable.
Good: ~3–4%
Red Flag: Above 6% with a payout ratio above 80-90%
Industry Averages:
- Utilities: 3–5%
- REITs: 3–6%
- Consumer Staples: 2–4%
- Tech: 0–2%
- Energy: 2–5%
-----------------------------------------------------
💡 Final Thought: How to Use All of This
Top investors don’t use just one metric. They look at the whole picture:
Good growth? Check PEG.
Good profits? Confirm with ROE and margin.
Safe balance sheet? Look at D/E and cash flow.
Fair valuation? P/E + FCF Yield + P/B.
Real power = Combining metrics.
A company with P/E 15, PEG 0.8, ROE 20%, low debt, and positive FCF? That’s your winner.
A stock with P/E 8, but no growth, high debt, and negative cash flow? That’s a trap.
-----------------------------------------------------
Real-World Combos
🎯Winners:
Tech Gem: P/E 20, PEG 0.8, ROE 25%, D/E 0.4, growing FCF, EPS 20%+ (e.g., NVIDIA 2023: AI-driven growth, stock soared).
Energy Steal: P/E 15, P/B 1.5, FCF positive, Dividend Yield 3.5% (e.g., Chevron 2023: Cash flow king).
⚠️Traps:
Value Trap: P/E 8, flat EPS, D/E 2.5, negative FCF (e.g., Peloton 2023).
Overhyped Tech: P/E 50, PEG 3, Net Margin 5%, D/E 1.5 (e.g., Rivian 2024).
-----------------------------------------------------
🚀 Share your own combos!
What do you personally look for when picking a stock?
If you spotted something off in the numbers, or have a valuable insight to add — please, drop it in the comments.👇
💡 Let’s turn this into a thread that’s not just good but superb and genuinely helpful for everyone.
-----------------------------------------------------
Final Thought
“Buy great companies at fair prices, not fair companies at great prices.” – Warren Buffett
This guide gives you the map.
Charts, tell you when.
These numbers tell you what, and why.
And this post?
It’s just the beginning!
These 9 metrics are part one of a bigger series I’m building — where we’ll go even deeper, with more advanced ratios, smarter combos, and real case studies.
If this guide helped you see financial numbers a little clearer, there’s a good chance it’ll help your investor friend too, especially if they’re just starting their journey...🤝Share it with them!
I built this as much for myself as for anyone else who wants to get better.👊
If you made it this far — thank you! 🙏
...and super thankful if you hit "The Boost" on this post 🚀
Cheers,
Vaido
