Beware of the FOMO trap: Financial advisor shares key ratios to check before betting on stocks
For first-time investors, the message is clear: keep emotions — and FOMO — at bay, and let the numbers guide you.
- Jul 13, 2025,
- Updated Jul 13, 2025 4:54 PM IST
When it comes to stock markets, jumping in without homework can be costly — a lesson Advait Arora of Wealth Enrich knows all too well. Sharing a personal anecdote, he recalled how his cousin lost ₹4 lakh chasing hype and “FOMO stocks.”
“No research, just tips,” Arora wrote in a series of posts on X (formerly Twitter). “I sat with him down, reminded him why basics matter & explained 8 simple ratios every investor should know. If you invest in direct stocks, this is worth your time.”
Here’s Arora’s essential checklist for first-time investors to avoid costly mistakes:
1. Price to Earnings (P/E) Ratio “This tells you how much you’re paying for every ₹1 the company earns. Example: TCS is at ₹3,600, earns ₹150 per share → P/E = 24. So you’re paying ₹24 to earn ₹1. If similar companies are at 18–20 & this is 30, it might be expensive. High P/E is fine if growth is strong. But if not, think twice. Never judge a stock just by a low or high P/E. Always compare with others in the same sector.”
2. PEG Ratio (Price to Earnings Growth) “This one balances valuation with growth - it’s P/E divided by profit growth. Example: A stock has P/E of 20, profit grows at 15% → PEG = 1.33. PEG around 1 is okay. Below 1 could be undervalued. Above 2 might be expensive unless the company is growing really fast.”
3. Price to Book (P/B) Ratio “Helps you see how the stock price compares to the company’s net worth. Example: HDFC Bank at ₹1,600, book value ₹500 → P/B = 3.2. For banks, generally a P/B between 1.5 & 2.5 is normal. If it’s above 3, look for strong ROE or growth to justify it. Especially useful for banking & financial stocks.”
4. Current Ratio “Checks if the company can pay its short-term bills comfortably. 1.5 to 2.5 is usually safe. Below 1 means the company may face cash problems.”
5. Debt to Equity (D/E) Ratio “Shows how much debt a company has compared to its equity. D/E above 1 means higher risk. Above 2 is a red flag in sectors like infra or real estate. Also check how the debt is being used.”
6. Return on Equity (ROE) “Tells you how well the company uses investor money to make profit. ROE above 15% means the company is managing capital well.”
7. Return on Capital Employed (ROCE) “Tells you how efficiently the company is using all its capital. A good company usually has ROCE above 15%.”
8. Sales & Profit Growth “A good business should show consistent growth in both revenue and profit over 3–5 years. Be cautious of companies where profit jumps suddenly without sales moving.”
Arora signs off with his favourites: “Coming to my 3 most favourites? PEG, Sales+Profit Growth & ROCE. They tell me if the business is growing, fairly valued, & using capital wisely.”
For first-time investors, the message is clear: keep emotions — and FOMO — at bay, and let the numbers guide you.
When it comes to stock markets, jumping in without homework can be costly — a lesson Advait Arora of Wealth Enrich knows all too well. Sharing a personal anecdote, he recalled how his cousin lost ₹4 lakh chasing hype and “FOMO stocks.”
“No research, just tips,” Arora wrote in a series of posts on X (formerly Twitter). “I sat with him down, reminded him why basics matter & explained 8 simple ratios every investor should know. If you invest in direct stocks, this is worth your time.”
Here’s Arora’s essential checklist for first-time investors to avoid costly mistakes:
1. Price to Earnings (P/E) Ratio “This tells you how much you’re paying for every ₹1 the company earns. Example: TCS is at ₹3,600, earns ₹150 per share → P/E = 24. So you’re paying ₹24 to earn ₹1. If similar companies are at 18–20 & this is 30, it might be expensive. High P/E is fine if growth is strong. But if not, think twice. Never judge a stock just by a low or high P/E. Always compare with others in the same sector.”
2. PEG Ratio (Price to Earnings Growth) “This one balances valuation with growth - it’s P/E divided by profit growth. Example: A stock has P/E of 20, profit grows at 15% → PEG = 1.33. PEG around 1 is okay. Below 1 could be undervalued. Above 2 might be expensive unless the company is growing really fast.”
3. Price to Book (P/B) Ratio “Helps you see how the stock price compares to the company’s net worth. Example: HDFC Bank at ₹1,600, book value ₹500 → P/B = 3.2. For banks, generally a P/B between 1.5 & 2.5 is normal. If it’s above 3, look for strong ROE or growth to justify it. Especially useful for banking & financial stocks.”
4. Current Ratio “Checks if the company can pay its short-term bills comfortably. 1.5 to 2.5 is usually safe. Below 1 means the company may face cash problems.”
5. Debt to Equity (D/E) Ratio “Shows how much debt a company has compared to its equity. D/E above 1 means higher risk. Above 2 is a red flag in sectors like infra or real estate. Also check how the debt is being used.”
6. Return on Equity (ROE) “Tells you how well the company uses investor money to make profit. ROE above 15% means the company is managing capital well.”
7. Return on Capital Employed (ROCE) “Tells you how efficiently the company is using all its capital. A good company usually has ROCE above 15%.”
8. Sales & Profit Growth “A good business should show consistent growth in both revenue and profit over 3–5 years. Be cautious of companies where profit jumps suddenly without sales moving.”
Arora signs off with his favourites: “Coming to my 3 most favourites? PEG, Sales+Profit Growth & ROCE. They tell me if the business is growing, fairly valued, & using capital wisely.”
For first-time investors, the message is clear: keep emotions — and FOMO — at bay, and let the numbers guide you.