How can I analyze the stock maths so that I can know how promising the company is.
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Before buying a company's stock, don't look at the share price alone. Study the company's financial health, profitability, debt and future prospects. Here are six important things to examine: 1. Revenue growth Check whether the company is selling more goods or services over the last three to five yeRead more
Before buying a company’s stock, don’t look at the share price alone. Study the company’s financial health, profitability, debt and future prospects.
Here are six important things to examine:
1. Revenue growth
Check whether the company is selling more goods or services over the last three to five years. Consistent growth can indicate a healthy business, although you should also investigate the reasons behind it.
2. Profitability
Look at operating profit and net profit. Is the company consistently making money, or does it report profits in one year and losses in another? Also compare profit growth with revenue growth.
3. Debt level
Examine the company’s borrowings and ability to pay interest. Heavy debt can become a problem when interest rates rise or business income falls.
4. Cash flow
A company can report accounting profits without generating enough actual cash. Check its cash flow from operating activities to see whether its core business generates cash.
5. Dividend history
If you want dividend income, check whether the company has a consistent dividend record and whether its earnings and cash flow can support future payments. Remember that dividends are never guaranteed.
6. Valuation
Even a financially strong company can be a poor investment if you pay too much for its shares. Compare its price-to-earnings (P/E) ratio, earnings per share (EPS) and other relevant valuation measures with similar companies and its own history.
Where can you find this information?
For Nigerian stocks, start with the company’s published annual reports, audited financial statements and latest interim results. You can also check disclosures on the Nigerian Exchange (NGX) website.
My final advice
Don’t buy a stock simply because its price is rising, its dividend yield is high or people are recommending it.
Look for a business with healthy finances, sustainable profits, manageable debt and reasonable valuation. Then consider whether its prospects fit your investment goals and risk tolerance.
No single ratio can tell you everything. Study the numbers over several years and understand what is driving them before making your decision.
See lessLet me breaks it down in a way even a beginner will understand. Think of buying a stock like buying a shop. You want a shop that makes money, doesn't owe too much, and is not too expensive. Here are 4 easy checks: 1. Does it make real money? Look at [EPS]. It means "profit per share". If EPS was 1 NRead more
Let me breaks it down in a way even a beginner will understand.
Think of buying a stock like buying a shop. You want a shop that makes money, doesn’t owe too much, and is not too expensive.
Here are 4 easy checks:
1. Does it make real money?
Look at [EPS]. It means “profit per share”. If EPS was 1 Naira last year and 2 Naira this year, the company is growing. If it’s going down, avoid it.
2. Does it borrow too much?
Look at [Debt]. If a company borrows 10 million but only owns 2 million, it’s in trouble. You want low debt. Check its report – does it owe more than it owns?
3. Is the price too high?
Look at [P/E Ratio].
`P/E = Price of one share / Profit of one share’.
If you pay 100 naira for a share that only makes 2 naira profit, P/E is 50 (very expensive). If P/E is 5 to 10, it’s usually cheaper and better.
4. Is it good at using money?
Look at [ROE].
`ROE = Profit / Owner’s Money’.
It tells you how good they are at turning money into more money. Above 15% every year is excellent.
*Beginner’s formula:*
See lessGood Revenue (sales are increasing) + Good Profit (EPS is increasing) + Low Debt + Not Expensive Price (low P/E) = Strong Company.
You can start your research on NGX
You can start your research on NGX
See lessLet's say you have a friend named Chinedu who loves farming. Chinedu decides to plant some tomatoes in his farm, thinking he will make good money from selling them. Now, before Chinedu invests his time and money in growing tomatoes, what does he need to know to understand if his tomato venture willRead more
Let’s say you have a friend named Chinedu who loves farming. Chinedu decides to plant some tomatoes in his farm, thinking he will make good money from selling them. Now, before Chinedu invests his time and money in growing tomatoes, what does he need to know to understand if his tomato venture will be successful or not? Let’s break it down like we are explaining it to Mama Ngozi:
1. Analyzing the company (Chinedu’s Tomato Farm): Just like we want to know how promising a company is before investing in its stock, Chinedu needs to assess his tomato farm business.
2. Understanding the Basics: Chinedu should start by looking at how many tomatoes he expects to harvest and how much he plans to sell them for. This is like checking how much profit a company is making when you analyze a stock.
3. Evaluating the Health of the Business: Chinedu should also check if his tomatoes are growing well, free from diseases and pests. Similarly, investors look at a company’s financial health.
4. Comparing with Other Farms: Chinedu can compare his farm with other tomato farms in the area. Likewise, investors compare different companies before deciding where to put their money.
5. Quality Check: Chinedu must ensure that his tomatoes are of good quality to attract customers. In the stock market, people look at the quality of the company and its products/services.
6. Pricing Strategy: Chinedu needs to set the right price for his tomatoes to make a profit. Investors check if the stock price is fair compared to the company’s value.
7. Market Trends: Knowing the demand for tomatoes in the market helps Chinedu decide how much to plant. Investors study market trends to understand the demand for a company’s products or services.
8. Risk Assessment: Chinedu should also think about potential risks like bad weather affecting his harvest. Similarly, investors assess the risks involved in investing in a company.
9. Making Informed Decisions: By analyzing all these factors, Chinedu can make an informed decision about whether his tomato farming venture is promising or not. Similarly, investors analyze different aspects of a company before deciding to buy its stock.
So, when looking at stock investments, think of it like assessing a friend’s tomato farm – you want to ensure it has good potential to grow and yield a healthy profit. Learning these basics can help you make wiser investment decisions.
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