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In the Nepal Stock Exchange (NEPSE), Ratio Analysis is one of the most powerful and practical techniques for understanding a company’s overall financial health in a simple, logical way. It transforms complex numbers from Balance Sheets, Profit and Loss Statements, and Cash Flow Statements into meaningful relationships that reveal how efficiently a company is operating, how much debt it carries, how profitable it is, and whether it’s overvalued or undervalued in the market. For Nepali investors — whether they are beginners or professionals — ratio analysis acts like a financial compass, guiding them toward strong, stable, and growing companies while helping avoid risky investments.

A financially strong company can be identified through a balanced combination of key financial ratios. The first group is Profitability Ratios, which show how effectively a company turns sales into profits. Among these, the Net Profit Margin tells how much profit remains after all expenses, while the Return on Equity (ROE) indicates how well a company uses shareholders’ funds to generate returns — a consistently high ROE (above 15%) signals strength. The Earnings Per Share (EPS) shows how much profit each share earns, and steady EPS growth represents business stability and investor confidence.

Next, Liquidity Ratios show whether a company can meet its short-term obligations. The Current Ratio (Current Assets ÷ Current Liabilities), ideally between 1.5 and 2, reflects good liquidity, while the Quick Ratio, which removes inventory, provides an even clearer picture of a company’s short-term solvency. Companies with strong liquidity ratios are better positioned to handle financial uncertainty and unexpected downturns.

The third group, Leverage Ratios, assesses the company’s debt and financial risk. A low Debt-to-Equity Ratio shows that the company depends more on equity than borrowed funds, which is safer for long-term investors. Similarly, the Interest Coverage Ratio reveals how comfortably a company can pay its interest expenses from profits — a high ratio indicates solid earnings and financial discipline.

Finally, Efficiency and Valuation Ratios measure how effectively the company uses its resources and how reasonably its shares are priced. The Asset Turnover Ratio indicates how efficiently assets are used to generate revenue, while the Price-to-Earnings (P/E) Ratio helps determine whether the stock is undervalued or overvalued compared to its earnings. A low P/E ratio with steady profit growth often suggests a good buying opportunity for long-term investors.

In the context of Nepal, ratio analysis is crucial for sectors like banking, hydropower, insurance, and manufacturing, where financial performance often differs despite similar stock prices. Many NEPSE-listed companies show profits on paper but have weak liquidity or high debt — issues easily detected through ratio analysis. By understanding and applying these ratios, investors can make data-driven, rational decisions rather than emotional ones.

According to Sandeep Kumar Chaudhary, Nepal’s leading Technical and Fundamental Analyst and founder of NepseTrading Training Institute, “Ratio Analysis is the foundation of intelligent investing. It helps you see beyond price fluctuations and discover the real strength behind a company’s numbers.” With 15+ years of banking and market experience, and advanced training from Singapore and India, he has taught over 10,000 Nepali investorshow to analyze financial statements using ratios for informed, confident decision-making. His NepseTrading Training Institute is Nepal’s most trusted destination for learning professional stock market education.