Common Biz Ratios

👉 Quick heuristic across all four:

Numerator = what you care about (profit, debt, assets, price).
Denominator = the scale you’re comparing against (sales, equity, liabilities, earnings).

That way, ratios always tell you: “relative to what?”

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Profit Margin

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Debt-to-Equity Ratio

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Current Ratio

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P/E Ratio

Ratio	Plain Meaning	Formula	Numerator (what’s on top)	Denominator (what’s on bottom)
Profit Margin	How much profit is kept from each $1 of sales	Net Income ÷ Sales	Net Income = leftover after costs, interest, taxes	Sales = total $ brought in
Debt-to-Equity	How much debt vs. owner funding	Debt ÷ Equity	Debt = borrowed money owed to creditors	Equity = owners’ stake
Current Ratio	Can I cover near-term bills with near-term assets?	Current Assets ÷ Current Liabilities	Cash, receivables, inventory (convertible in ≤1 year)	Bills, debt, payables due ≤1 year
P/E Ratio	How much investors pay for $1 of earnings	Price ÷ EPS	Price = market price per share	Earnings per share (profit per share)

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More on P/E

2. The Plain-English Story

Price per Share ($200): What investors are willing to pay to own one share today.
Earnings per Share ($20): What that share earned in profit over the past year.
The Ratio (10): Investors are paying 10 times the company’s current earnings for each share.

3. Clarifying Your Point

You’re right: there’s a “gap” between what the stock earns now ($20) and what people are paying for it ($200). But it’s not a $180 “loss.” It’s a premium based on expectations.

Think of it this way:

If earnings stayed flat at $20/year forever, it would take 10 years of those earnings to “earn back” the $200 paid today.
But usually, investors pay that premium because they expect earnings to grow — maybe from $20 this year to $25, then $30, and so on.

4. Pithy Definition

👉 “The P/E ratio tells you how many years of today’s earnings investors are willing to pay for right now.”

✅ Quick check for you:

If another company also has EPS of $20, but its stock trades at $400, what’s its P/E ratio — and what is the market implying by paying that much?

Ah — I see exactly what you’re getting at now. You’re being very concrete:

What exists today (tangible): The company just earned $20/share. If it stopped there and liquidated, that’s all you could point to.
What investors are actually paying: $200/share.
The “gap” ($180): That’s the premium the market is willing to pay for everything beyond today’s earnings — i.e., the company’s growth prospects, brand value, IP, customer base, competitive advantage, etc.

How to Phrase It Clearly

👉 “The P/E ratio shows how much of the stock price is supported by today’s earnings versus how much is a bet on the future. In this case, $20 is grounded in current profit, and $180 is the premium investors assign to future potential.”

This makes P/E a powerful lens:

Low P/E → most of the price is explained by current earnings.
High P/E → most of the price is explained by expected growth (a ‘story stock’).

Common Biz Ratios

Profit Margin

1. “The Slice of the Pie”

2. “The Toll Booth”

3. “For Every Dollar Sold…”

4. Extremes (to sharpen intuition)

5. Competitive Intuition