How to Know If an NGX Stock Is Actually Worth Buying | Smart Investor’s Guide to NGX Stocks (Part 2 of 3)

Introduction

In Part 1 of this series, we learned something important:

A stock price alone tells you very little.

We learned how smart investors look beyond price and pay attention to:

• Volume
  • Market Capitalization
  • 52-Week Highs and Lows
  • Market activity

But now we arrive at a much bigger question:

How do you know if a stock is actually worth buying?

Because here is the truth:

A stock can look exciting and still be a bad investment.

A stock can look boring and quietly become wealth-building gold.

That is why experienced investors ask a different question from beginners.

Beginners often ask:

“Is this stock moving?”

Smart investors ask:

“Is this business actually worth owning?”

And to answer that question, we must look at the fundamentals.

Take another look at the AIICO stock screen above.

Today, we will use it as our guide again.

Because hidden inside those numbers are clues that help investors evaluate whether a stock may be undervalued, overpriced, profitable, or attractive for long-term investing.

Let us start with one of the most misunderstood numbers in investing.

1. P/E Ratio — Is The Stock Cheap Or Expensive?

On the AIICO screen, you may notice something called:

P/E Ratio

This stands for:

Price-to-Earnings Ratio

Do not let the name intimidate you.

Think of it this way:

The P/E Ratio helps investors estimate whether they may be paying too much for a company’s earnings.

Imagine two rental properties.

Both generate rental income.

But one costs ₦50 million.

The other costs ₦200 million.

Naturally, you ask:

“Why am I paying so much more?”

That is similar to what P/E helps investors evaluate.

In simple language:

P/E tells you how much investors are paying for each ₦1 of company earnings.

Generally speaking:

Lower P/E

May suggest a stock is relatively undervalued.

Higher P/E

May suggest investors already expect strong future growth.

But here is the important warning:

A low P/E does not automatically mean “buy.”

Sometimes stocks are cheap for good reasons.

Weak growth.

Poor management.

Declining profits.

Likewise:

A high P/E is not automatically bad.

Sometimes great companies deserve premium valuations.

Smart investors ask:

“Why is the valuation what it is?”

2. EPS — Is The Company Actually Making Money?

Now, let us look at another important number on the AIICO screen:

EPS

Which stands for:

Earnings Per Share

This answers a simple but powerful question:

Is this company actually profitable?

Think of EPS like a business report card.

It measures how much profit belongs to each share of stock.

In simple language:

The higher the earnings, the healthier the business may be.

Positive EPS often suggests:

• profitability
• operational strength
• business sustainability

Negative or weak EPS may raise caution.

Because ultimately:

Strong businesses usually create stronger long-term investment opportunities.

No company survives forever without earnings.

And smart investors pay attention.

3. Dividend Yield — Are You Being Paid To Wait?

Many NGX investors love dividends.

And understandably so.

Dividend investing is one of the strongest attractions of the Nigerian stock market.

This is where:

Dividend Yield

becomes important.

Dividend yield helps answer:

How much income is this stock generating relative to its price?

Imagine two savings options.

One gives little return.

The other pays a meaningful income consistently.

Naturally, income-focused investors pay attention.

That is what dividend yield helps measure.

But here is where beginners often make mistakes:

A high dividend yield alone does not make a stock attractive.

Sometimes, unusually high yields happen because:

The stock price has fallen sharply.

And sometimes dividends are not sustainable.

This is why smart investors ask:

“Can this company continue paying?”

Not just:

“How much is it paying today?”

A smaller, sustainable dividend is often better than an unrealistic one.

4. ROE — Is Management Using Investors’ Money Wisely?

Another powerful number on the AIICO screen is:

ROE

Or:

Return on Equity

In simple language:

ROE measures how effectively management uses shareholders’ money to generate profit.

Imagine two business managers.

You give both ₦100 million.

One grows it efficiently.

The other struggles.

Who would you rather trust?

That is essentially what ROE helps investors understand.

Generally speaking:

Higher ROE

May suggest stronger efficiency.

Lower ROE

May signal weaker business performance.

Of course:

ROE should never be studied in isolation.

But it provides useful insight into management effectiveness.

5. Price-to-Book Ratio (P/B) — Are You Paying Too Much For Assets?

Now let us examine another overlooked number:

Price-to-Book Ratio (P/B)

This compares:

The market price of a company to the value of its assets.

Think of it like buying real estate.

Suppose a property contains valuable land, buildings, and assets.

Would you want to massively overpay?

Probably not.

That is similar to what P/B helps investors evaluate.

Generally:

Lower P/B

May suggest relative undervaluation.

Higher P/B

May suggest investors are paying a premium.

Again:

There are no automatic conclusions.

The number simply adds another piece to the puzzle.

What Smart Investors Actually Do

Now notice something important.

Smart investors do not rely on one number.

They combine signals.

Imagine this AIICO example:

P/E Ratio

Reasonable

EPS

Positive

Dividend Yield

Healthy

ROE

Strong

P/B

Not excessive

Suddenly, the question becomes:

“Could this stock deserve deeper consideration?”

Now imagine the opposite:

Weak earnings.

Unsustainable dividends.

Poor ROE.

Expensive valuation.

Smart investors pause.

Because investing is not gambling.

It is informed decision-making.

Mid-Series Reminder

By now, you are already reading stocks far more intelligently than many investors.

In Part 1, we learned how to understand stock numbers.

In Part 2, we learned how to evaluate business quality.

But one final question remains:

When is the right time to buy?

That is exactly what we will answer in:

PART 3 OF 3

How Smart Investors Time Their Entry into NGX Stocks

We will break down:

• RSI
  • MACD
  • Moving Averages
  • Momentum Indicators

Because:

Even a great stock bought at the wrong time can still disappoint.

Key Takeaways

Before buying any NGX stock:

1. P/E Helps Evaluate Valuation

Cheap-looking stocks are not always bargains.

2. EPS Reveals Profitability

Healthy businesses usually generate earnings.

3. Dividend Yield Measures Income

Focus on sustainability — not hype.

4. ROE Reflects Management Efficiency

How wisely is investor capital being used?

5. P/B Adds Asset Context

Avoid paying too much relative to value.

Frequently Asked Questions (FAQ)

What is the most important fundamental metric?

No single number tells the full story.

Smart investors combine several signals.

Does a low P/E automatically mean undervalued?

No.

Cheap stocks can remain cheap for valid reasons.

Is a high dividend yield always good?

No.

Always ask whether the dividend is sustainable.

Should I ignore technical indicators?

No.

Fundamentals tell you what to buy.

Technical indicators often help determine when to buy.