Successful stock picking on the Nigerian Stock market involves examining cash flow, company debt, return on assets, market trends and all other factors that can affect the value of a company’s stock in the future.
As a new investor in the Nigerian stock market, the major challenges encountered when entering the market are understanding basic trading terms, choosing a suitable online broker to use.
After you’ve done these two things, the next step is learning how to analyse stocks. In this blog post, we are going to be taking you on a step-by-step journey on how to analyse stocks on the Nigerian stock market.
Company Debt level
A fundamental requirement for good stock picking on the Nigerian stock market is evaluating a company’s debt level. Although having debts can be good for a company, if it has enough cash flow to cover its monthly payments. But if it does not, it stands a chance of exposing their investors to a high level of financial risk.
How to Analyse a Company’s Debt
When analysing a company’s debt for investment in the stock market. It is important to pay attention to long-term debt rather than just company cash flow. The ability of a company to effectively manage its debt is fundamental in the process of good stock picking on the Nigerian stock market.
Check out insider deals
Monitoring insider transactions also helps when carrying out stock analysis in the Nigerian stock market. A company whose management team has a substantial stake in the company is one to invest in. Because it shows a great deal of confidence in the future performance of the company. However, a high amount of insider selling may hint that the company stock is about to collapse.
Competitive advantage of the company
A company without a competitive advantage is not one to invest in. When picking stocks on the Nigerian Stock market you want to invest in companies that will stand the test of time. Stock analysis also involves identifying companies that will keep giving high returns over a long period.
Company’s profitability
As important as it is to monitor a company’s profit, it is also more important to know how much was invested as capital into the company. For instance, a company ABC made a profit of 100,000NGN and a total of 1,000,000NGN was invested as capital, which means the company only generated 1% ROC. But company XZY made a profit of 100,000NGN, and a total of 10,000NGN was invested, giving a higher ROC.
A high ROC of a company signifies efficient capital management and a company worth investing in.
Company Stock Price
The value of a stock on the Nigerian stock market must be assessed to determine if a company can live up to your expectations. To determine the value of a company’s stock, its PE ratio (price-to-earnings ratio) must be known. This ratio gives you insights into the value of a stock.
How can I calculate the PE ratio of a Stock?
For example, a company has a net income of 1,000NGN and has 100 shares in circulation, to determine how much a company makes per share, you divide the company’s net income of the last 12 months by the number of shares they have presently on the market. Of which in this scenario the company makes 10.00NGN per share. Now to determine its PE ratio, divide the current price of the company’s shares by how much it makes per share. The current stock price is 50.00NGN. Therefore, 50/10 = 5, this company has a PE ratio of 5.
Free access to companies PE ratio on our Stock trading Simulator, available on Android and IOS
What does the PE ratio of a stock signify?
The PE ratio of a company on the Nigerian Stock market signifies how many times the earnings per share investors are willing to pay for a share in that company. If the PE ratio of a company is 5, that shows investors are willing to pay 5 times the company’s earnings for that share.
What PE ratio is good?
A low PE ratio (5-10) signifies that the price of stocks is low, and investors see this as a good choice because less is paid for every naira earned. However, some investors don’t buy stocks from companies with low PE ratios, because they believe the company will not grow in the future. A strong PE ratio is typically between 20-25.
Get free access to the PE ratio of all companies listed on the Nigerian stock market, on Android and IOS.
In conclusion, stock picking on the Nigerian stock market involves, careful analysis of the companies listed. Do your proper research on various industries and sectors before making an investment decision. Also sticking to the basics as a beginner is sure to make you a lot of money in the long run.
What was it like purchasing your first stock? We would be thrilled to have you share your experiences with us in the comments!
