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Hello, I am Umesh Tripathi, and we are learning the concepts of Fundamental Analysis. 
In this video, we will be understanding how to use sector-specific metrics to evaluate a company’s performance. 
We will know why different sector companies need different valuation metrics. 

Here, we will learn with examples of some metrics from the banking sector, and also understand the ratios for NBFC and insurance sectors. Additionally, we will learn about the ratios related to the production and manufacturing sectors. 

So, when it comes to analyzing different sector companies, one important point which we investors or analysts often forget is to use different ratios for different sectors. 

For example, let me tell you about a company from the banking sector. This company’s name is Company XYG. During the analysis of this company, I found that its debt-to-equity ratio is around 12. 

We are taught in fundamental analysis that we should select those kinds of companies whose debt-to-equity ratio is 1 or less than 1. A debt-to-equity ratio of less than 1 means that the company has less debt pressure and can focus on its growth. 

If a company has a debt-to-equity ratio greater than 1, it means that most of the efforts are going into minimizing loans, and the cash is being used mainly to pay off debts. 

But what I didn’t know was that in the case of banking sector companies, mostly NPAs are associated with them, and their debt-to-equity ratios are generally seen to be greater than 1. 

So, if we know which specific performance metrics to focus on while analyzing companies from a particular sector, then we can accurately evaluate those companies. 

All in all, whether it’s the banking sector, the insurance sector, or the manufacturing sector, there are different evaluation metrics or ratios for each, which we should focus on. 

For example, the banking sector mostly relies on deposits, lending, and asset quality. 
If we start looking at unrelated ratios there, then we won’t be doing an accurate analysis. 
In that case, we would not be able to make an accurate investment decision when it comes to analyzing banking sector companies. 

Similarly, if we are analyzing NBFCs or insurance companies, we should study the ratios related to those sectors. 

Likewise, manufacturing or product-based companies mostly focus on capacity, efficiency, and inventory management. 
So, when we are analyzing manufacturing companies, we have to analyze ratios around these points — i.e., inventory management, capacity, or efficiency. 

Now, let’s discuss some important banking sector ratios. 
The first ratio here is Net Interest Margin, which basically measures lending profitability. 

So, what is Net Interest Margin? 
It is interest income minus interest expense, divided by average earning assets. 

For example, a banking sector company has an interest income of ₹1000 crore. In this example, XYG Bank’s interest expense is ₹600 crore, and its average earning assets are ₹10,000 crore. 
So, the Net Interest Margin of this particular banking company comes out to be around 4%. 

Through Net Interest Margin, we can judge the profitability arising from lending. 
So, Net Interest Margin can be beneficial for us if we are analyzing a banking sector company. 

Similarly, in the banking sector, Capital Adequacy Ratio (CAR) is an important ratio, which assesses the capital strength versus risk. 

Basically, CAR is calculated by dividing Tier 1 Capital + Tier 2 Capital by Risk-Weighted Assets, and then multiplying by 100. 

Tier 1 Capital is the core capital of a banking company. 
Tier 2 Capital is supplementary capital, such as revaluation reserves, hybrid instruments, or subordinated debts. 

For example, XYG’s Tier 1 Capital is ₹12,000 crore, Tier 2 Capital is ₹3,000 crore, and Risk-Weighted Assets are ₹1 lakh crore. 
So, the Capital Adequacy Ratio here comes out to be 15%. 

This means the bank is well-capitalized above the minimum requirement — that’s what we can understand from this example. 

Along with this, Gross NPA and Net NPA are also important ratios for analyzing the banking sector. 

Now, what is NPA? 
NPAs are Non-Performing Assets — or in simple words, bad debts or bad loans. 
It indicates the proportion of a bank’s total loans that have turned bad — i.e., borrowers who have not repaid their loans. 

The Gross NPA Ratio is calculated by dividing Gross NPAs by total advances and multiplying by 100. 
The Net NPA Ratio is a bit different — we subtract provisions from Gross NPAs and then divide by total advances, multiplying by 100. 

If a company’s NPAs are very high, it impacts the bank’s overall capital and also affects the Capital Adequacy Ratio. 

In the banking sector, another important ratio is CASA Ratio, which defines the proportion of low-cost deposits. 

CASA Ratio measures the proportion of a bank’s total deposits that come from current and savings accounts. 

The formula is: 
(Current Account Deposits + Savings Account Deposits) ÷ Total Deposits × 100 

For example, in this bank, current account deposits are ₹15,000 crore, savings account deposits are ₹8,000 crore, and total deposits are ₹50,000 crore. 
So, the CASA Ratio comes out to be around 46%. 

This means 46% of the total deposits in this bank are contributed by current and savings account deposits. 

Now let’s discuss a few ratios of the NBFC and insurance sectors. 

In the case of NBFCs, the Debt-to-Equity Ratio is an important ratio. 
It measures leverage levels and risk exposure. 

For NBFCs, generally, a Debt-to-Equity Ratio of less than 5 means conservative leverage and room to raise more debt. 
If it’s between 5 and 7, it indicates high leverage, which is typical for NBFCs. 
If it’s above 7, it can be a regulatory breach unless exempted — and there can be a risk of RBI action. 

So, in the case of NBFCs, the Debt-to-Equity Ratio should ideally be between 5 and 7. 
Generally, when we analyze companies, we say the Debt-to-Equity Ratio should be less than 1 — but that’s not applicable to NBFCs. 

Therefore, certain ratios are very important for analyzing certain industries or sectors. 

Along with that, Interest Coverage Ratio is also an important ratio for NBFCs. 
It measures a company’s ability to pay interest on its debt using its operating earnings. 

The formula is: 
EBIT (Earnings Before Interest and Taxes) ÷ Interest Expense 

Interest Expense means the total interest payable on the debt. 

Now, let’s talk about the insurance sector ratios. 

The Combined Ratio is an important ratio used when analyzing insurance companies. 
It measures profitability before investment income, comparing claims and expenses versus premiums earned (mainly for general insurance). 

The formula is simple: 
(Claims + Expenses) ÷ Premiums Earned 

Another important ratio is the Persistency Ratio, especially for life insurance companies. 
It measures customer retention — i.e., the percentage of policyholders who continue their policies upon renewal over a period of time. 

It is calculated for the nth month: 
(Number of policies in force after n months ÷ Number of policies issued n months ago) × 100 

For example, if 10 months ago, a certain number of policies were issued, and today only a certain portion of them are still active, dividing the two and multiplying by 100 gives the persistency ratio. 

Similarly, the Solvency Ratio is another important ratio when analyzing insurance sector companies. 
It tells you the financial strength to meet the company’s liabilities — the ability to meet long-term obligations. 

The formula is: 
Available Solvency Margin ÷ Required Solvency Margin 

Now, let’s talk about examples of ratios for the production and manufacturing sector. 

Capacity Utilization is one such ratio, which measures efficiency in using installed capacity. 

Manufacturing companies have certain installations — manufacturing units or equipment. 
Capacity Utilization measures how efficiently these assets are being used. 

The formula is: 
(Actual Output ÷ Potential Output) × 100 

For example, if the actual output is 8,000 units and the maximum capacity is 10,000 units, the capacity utilization is 80%. 

Next, Inventory Turnover Ratio is another important factor. 
It measures how quickly a company sells and replaces its inventory. 

The formula is: 
Cost of Goods Sold ÷ Average Inventory 

For example, if the Cost of Goods Sold is ₹10 lakh and the Average Inventory is ₹2 lakh, the inventory turnover is 5 times. 

Another important ratio is Operating Margin, which shows profitability from core operations. 

The formula is: 
Operating Profit ÷ Revenue 

For example, if Operating Profit is ₹50 lakh and Revenue is ₹2 crore, the Operating Margin comes out to be 25%. 

Similarly, Asset Turnover Ratio is also an important ratio. 
It measures how efficiently assets are used to generate sales. 

The formula is: 
Revenue ÷ Total Assets 

For example, if Revenue is ₹5 crore and Total Assets are ₹2.5 crore, the Asset Turnover Ratio is 2x. 

So, all in all, different industries have different ratios that we have to analyze. 
Basically, tailored metrics actually lead us to better insights and analysis, which help us in making wise investment decisions, taking calculated risks, and strategic planning. 

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