Common Traps

Where ratios mislead.

Ratios are tools, not verdicts. The most common mistakes come from trusting one number without asking what's behind it. The value trap A very low P/E because earnings are expected to collapse, cheap for a reason. Debt-fuelled ROE High ROE propped up by heavy borrowing, not a great business. One-off profit A single asset sale inflating EPS and shrinking P/E for one year. Yield trap A high dividend yield because the price crashed, with a cut coming. Cross-sector compares Judging a bank's ratios against a hydropower firm's. The habit that protects you: whenever a number looks unusually good or bad, ask 'why?' before acting. The answer is usually in another statement.

Part of Learn NEPSE Investing, a free course on reading Nepali company accounts and charts. Section: Valuation.