Never invest in company you don’t know!

By MUNGAI KIHANYA

The Sunday Nation

Nairobi,

03 December 2017

Last week I the two most important factors a newcomer to the market of listed shares should consider before investing. These are whether a company makes profits and whether one can afford 100 shares in it.

The next question in the investment decision process is whether the shares are buying are expensive. That is, are they good value for money? There are two ways of making this assessment.

The first method involves comparing the price of the share to its earning potential. This is done by dividing the price by the earning reported in the most recent annual financial report. Now, the “Daily Share Report” table in the Business Daily newspaper shows this data for all the listed shares every day.

The data is in the column labeled “P/E Trailing”. P/E is short for Price to Earnings ratio. It is the result of dividing the price per share by the earning per share. The answer is the number of years it would take for the profit to recover the price.

With a P/E of 44.6 years at current prices, Eaagards Ltd has the most expensive shares under Sh50. Its price of Sh25 per share might look “affordable” but it is quite high given the latest annual profit of the company.

The cheapest shares in this category are those of Express Kenya Ltd with a P/E of 2.2 at the price of Sh4.0.

A closer look, however, reveals that both Eaagards and Express fall under the AIMS. AIMS stands for “Alternative Investment Segment” which is special category for smaller companies. This segment generally doesn’t record many trades so you might have difficulty buying or selling your shares.

Outside the AIMS, the most expensive shares are those of Sanlam Ltd (P/E = 43 at the price of Sh27.75) and the cheapest are Kenya Power (P/E = 2.89; at Sh10.75).

The other method of judging if shares are expensive is by comparing the price to the intrinsic value; that is, the value of the net assets of the company. Again, the “Daily Share Report” table in the Business Daily newspaper does this for you. It has a column labeled “P/B Trailing”.

P/B is short for Price to Book; that is, the ratio of the market price to the net book value. A negative quantity in this column is a clear red flag to be avoided at all costs. It means that the company is insolvent! Even if you see seasoned and strategic investors buying, don’t follow them blindly.

Using the P/B ratio, the most expensive company below Sh50 per share is Safaricom Ltd (P/B = 5.8 at Sh26.75 per share) and the cheapest is Olympia Capital Holdings Ltd (0.1; at Sh3.40).

Finally, and probably most important, never put your money in a company you don’t know! Ask yourself whether you know how the company makes its money. Do you know what it sells?