19 Indicators for NSE Investors: A Cheat Sheet for the NSE Company Research
- Are you looking to build a portfolio on the Nairobi Securities Exchange (NSE) but don't know where to start? In a market as unique as Kenya's, standard "Wall Street" advice doesn't always apply.
- To help you navigate, we’ve broken down the 19 essential fundamental ratios into five phases. Whether you are looking at a giant like Safaricom or a turnaround story like Kenya Power, this checklist is your roadmap to smarter investing.
- Unsure of which strategy to read for more insights into what fundamental analysis is
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| 19 Indicators for NSE Investors: A Cheat Sheet for the NSE Company Research |
Checklist to crossoff when performing Quantitative Analysis
Size and Scale of the Company
Market Cap
Share Price
Total Outstanding Shares
Structural Health (Solvency and Liquidity)
Shareholder’s Equity/ Book Value
Book Value Per Share (BVPS)
Debt to Equity
Interest Coverage Ratio
Current Ratio
Profitability and Efficiency
Earnings Per Share
Operating Margins
Return on Assets (ROA)
Return on Equity (ROE)
Cash and Growth
Free Cash Flow
Dividend Per Share
Payout Ratio
Dividend Yield
Valuation
Price to Earnings ratio
Price/Earnings to Growth ratio
Price to Book
Definition
Phase 1: Determining Company Size and Scale
1. Market Cap
Definition: This is the "Price Tag" of the entire company. It represents exactly what the public market believes the company is worth today.
Formula: {Current Share Price} x {Total Shares Outstanding}
Good Sign: Over Ksh 100 Billion. This qualifies the company for the "100 Billion Club" (Safaricom, Equity, KCB, EABL, Co-op). These companies are the most stable and have the most interest from foreign investors.
Note: Companies with a market cap of > KES 100bn are considered blue chip companies if they are also in the NSE 10 index
Warning: Dropping below Ksh 1 Billion. When a company's total value falls this low, it often loses the interest of major stockbrokers and institutional funds, leading to low trading volume. You might get stuck with its shares
2. Share Price
Definition: The cost of a single "slice" of the company. On its own, it doesn’t tell you if a stock is cheap or expensive, only what it costs to enter.
Good Sign: Steady upward trajectory over the years. Limited volatility
Warning: Extremely low prices (Penny Stocks) for an extended period, it often indicate a company struggling to stay listed with possible suspension or even delisting. Example: Mumias Sugar
3. Total Outstanding Shares
Definition: This tells you how many pieces the "company pie" is cut into.
Good Sign: Decreasing count. This means the company is buying back its own shares, making your remaining shares more valuable.
Warning: Increasing share count (Dilution). The company is creating new shares to raise money, which "waters down" your ownership and the overall share price.
Phase 2: Structural Health (Solvency & Liquidity)
4. Shareholder’s Equity / Book Value
Definition: This is the "Net Worth" of the company. If the company sold everything it owned and paid off every debt, this is the cash that would be left.
Formula: {Total Assets} - {Total Liabilities}
Good Sign: Positive and Cash-Backed. In Kenya, look for companies where equity is growing because of retained profits.
Warning: Negative Equity means the company is technically insolvent
5. Book Value Per Share (BVPS)
Definition: The "Accounting Value" of one share. It’s what one share is worth based on physical assets (buildings, cash, inventory) rather than future promises.
Formula: {Total Shareholders Equity} / {Total Outstanding Shares}
Good Sign: BVPS that is close to or higher than the share price. Many NSE stocks trade "below book," meaning you are essentially buying assets at a discount.
6. Debt to Equity (D/E)
Definition: This shows the balance between "Borrowed Money" vs. "Owner’s Money."
Formula: {Total Liabilities} / {Shareholder’s Equity}
Good Sign: Under 1.0. This means the company has enough revenue and income generation capacity to stay afloat.
7. Interest Coverage Ratio
Definition: A safety check for debt. It measures how many times the company could pay its annual interest bills using its yearly profit.
Formula: {EBIT} / {Finance Costs}
Note: EBIT is a more comprehensive measure to use than operating profits/ income
Formula for EBIT (Earnings Before Interest and Taxes): Operating Income/Profits + Interest Income (Non-operating income)
Good Sign: Above 4.0. They have plenty of "breathing room" to navigate unpredictable borrowing costs
Warning: Below 1.5. A small dip in sales or an increase in interest rates could make them unable to pay back their creditors.
8. Current Ratio
Definition: The "Emergency Fund" check. It asks: "Does the company have enough cash/assets to pay all bills due in the next 12 months?"
Formula: {Current Assets} / {Current Liabilities}
Good Sign: Above 1.5x. These companies are highly liquid and can survive payment delays, especially when dealing with the government.
Warning: Below 0.8x. They may have to sell assets or take loans just to keep their operations ongoing.
Phase 3: Profitability & Efficiency
9. Earnings Per Share (EPS)
Definition: This is the portion of profit allocated to each individual share. It is the primary driver of long-term stock prices.
Formula: {Net Profits} / {Total Outstanding Shares} or {Net Profits - Preferred Dividends} / {Total Outstanding Shares}
Good Sign: Consistent growth over 5 years. Avoid "one-hit wonders" who had a good year because they sold a piece of land.
Warning: A “Profit Warning” listed companies are legally required to issue a "Profit Warning" if they expect earnings to drop by more than 25% compared to the previous year
10. Operating Margin
Definition: This tells you what percentage of profit is left after paying for the actual business operations (labor, materials, rent).
Formula: {Operating Profit} / {Total Revenue} x 100%
Good Sign: Higher than industry peers / Having a competitive advantage over its peers (Moat)
Warning: Falling margins despite rising revenue suggest the company is losing its "competitive advantage" or "pricing power."
11. Return on Assets (ROA)
Definition: Efficiency check. It measures how efficiently the company is using all available assets & resources to generate a profit.
Formula: {Net Profits} / {Total Assets} x 100%
Good Sign: High ROA (Above 5%) suggests management is very smart with their investments.
Bad Sign: Below 1%, suggests that the company’s vast physical assets are essentially dead weight and are not generating profit
12. Return on Equity (ROE)
Definition: This is the "Efficiency for Shareholders." It measures the profit generated per shilling invested in the company.
Formula: {Net Profit} / {Shareholder Equity} x 100%
Good Sign: Above 15%–20%. This is the hallmark of a "Quality" company.
Warning: Negative ROE. This means the company is actively losing the money shareholders have invested.
Phase 4: Cash and Growth
13. Free Cash Flow (FCF)
Definition: The "Real Cash" left after the company has paid for all its operations and upgrades.
Formula: {Operating Cash Flow} - {Capital Expenditure}
Good Sign: Growing FCF. This cash can be used for dividends or buying other companies.
Warning: Negative FCF while reporting "Profits." This is where a company reports a profit on paper but has no cash in the bank because its "Debtors" aren't paying.
14. Dividend Per Share (DPS)
Definition: The literal cash "reward" sent to your CDSC account for every share you own.
Formula: (Total Dividends Paid) / {Total Outstanding Shares}
Good Sign: A history of uninterrupted payments. Kenyan investors value companies that pay even during tough economic times. Like Standard Chartered Bank.
Warning: A "skipped" Dividend. When a company that traditionally pays dividends suddenly stops (skips) a payment
15. Payout Ratio
Definition: Sustainability check. It shows what percentage of profits are being sent out as dividends.
Formula: {Dividend Per Share} / {Earnings Per Share} x 100%
Good Sign: 40% – 70%. Payout Ratio
Warning: Over 100%. They are paying out almost everything or more than what they earned in a year. Even using debts to pay dividends, which is unsustainable
16. Dividend Yield
Definition: Your "Interest Rate." It tells you what percentage of your investment you get back in cash each year.
Formula: {Annual Dividend Per Share} / {Current Share Price} x 100%
Good Sign: 7% – 12%, or comparable or higher than other investment vehicles (Government Securities)
Warning: > 20%. Often a "Yield Trap" where the price is falling because the company is failing./ The Share price has crashed./ The market had determined that the dividend would be cut soon
Phase 5: Valuation
17. Price to Earnings (P/E)
Definition: This tells you how many "years" of current profit you are paying upfront to own the stock. “How many years would it take to break even on an investment?”
Formula: {Current Share Price} / {Earnings Per Share}
Good Sign: Below 10.0. Many Kenyan banks trade at a P/E ratio of 3 to 7
Warning: An “N/A” P/E shows a company has no earnings/ making losses
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Price to Earnings (P/E) Ratio in the Banking Sector |
Definition: The "Growth Adjuster." It asks: "Is this high P/E justified by how fast the company is growing?"
Formula: {P/E Ratio} / {Annual EPS Growth Rate}
Good Sign: Under 1.0. You are getting high growth at a fair price.
Warning: Over 2.0. It shows you are paying a huge premium for growth that might not materialize in a volatile economy
19. Price to Book (P/B)
Definition: This compares the Market Value to the Accounting Value. It tells you if you are paying for the "stuff" the company owns or the "dreams" of future growth.
Formula: {Current Share Price} / {Book Value Per Share}
Good Sign: Below 1.0. In the current NSE market, many solid companies (especially banks) are trading at 0.5x or 0.8x their book value. This means you are buying Sh1.00 of assets for 80 cents.
Warning: Consistently below 0.3x. While 0.8x is a "bargain," a P/B of 0.2x often suggests the market believes the company's assets are fake, obsolete, or about to be seized by creditors.
Final Note
- When researching a Kenyan company, the biggest red flag is a combination of High Debt (D/E > 1.5) and Negative Free Cash Flow. In our high-interest-rate environment, this combination almost always leads to a collapse in share price and a "Passed" dividend.
- Unsure of what strategy you would like to employ moving forward, check out this post on "Choosing your strategy in the NSE"
Disclaimer: This post is for educational purposes and does not constitute financial advice.
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