How Does Fundamental Analysis Work for NGX Stocks?
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A fundamental analysis is like picking the best tomatoes in the market. Just as Mama Ngozi carefully examines each tomato for quality, size, and freshness before buying, fundamental analysis involves studying a company's financial health before investing in its stock.When Mama Ngozi looks at a tomatRead more
A fundamental analysis is like picking the best tomatoes in the market. Just as Mama Ngozi carefully examines each tomato for quality, size, and freshness before buying, fundamental analysis involves studying a company’s financial health before investing in its stock.
When Mama Ngozi looks at a tomato, she checks if it is fresh, ripe, and free from blemishes. Similarly, when investors conduct fundamental analysis, they assess a company’s financial statements, earnings, debts, and growth prospects to determine if it is a good investment.
By understanding the company’s fundamentals, like its revenue, profits, debts, and competitive position in the market, investors can make informed decisions about buying or selling its stock. It’s like Mama Ngozi inspecting the tomatoes to ensure she picks the best ones to sell at her stall.
So, with fundamental analysis, investors look beyond the surface of a company to see if it is a strong and healthy investment, just like Mama Ngozi carefully examines each tomato to ensure it meets her standards before selling.
See lessFundamental analysis is basically looking beyond the share price to understand the actual business behind an NGX stock. For example, assume Company A is trading at ₦100 and has 1 billion shares, while its annual profit is ₦20 billion. EPS = ₦20bn ÷ 1bn shares = ₦20 per share. P/E = ₦100 ÷ ₦20 = 5x.Read more
Fundamental analysis is basically looking beyond the share price to understand the actual business behind an NGX stock.
For example, assume Company A is trading at ₦100 and has 1 billion shares, while its annual profit is ₦20 billion.
EPS = ₦20bn ÷ 1bn shares = ₦20 per share.
P/E = ₦100 ÷ ₦20 = 5x.
Now assume Company B is also trading at ₦100, but it only makes ₦5 billion profit.
Its EPS is ₦5 and its P/E is 20x.
So although both stocks cost ₦100, you’re getting very different levels of earnings for the same share price.
But I wouldn’t stop at P/E. I would also check revenue and profit growth, debt, cash flow, dividends, ROE, the company’s industry, future growth prospects and the risks facing the business.
That’s how I would use fundamental analysis: understand the business first, then determine whether the price makes sense relative to what the business is actually producing.
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