Ultimate NSE Valuation & Profit-Readiness Guide

This guide explains key financial metrics used to analyze companies listed on the Nairobi Securities Exchange (NSE). For each metric you’ll find: what it measures, where to get it, how to interpret it, and a short example to show real-world use.

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🧾 1. Income Statement Checks

Parameter	Purpose / What It Tells You	Where to Get It	How to Interpret
Revenue (Sales)	Measures the company’s total income (top-line). Growth indicates demand and expansion.	Income statement (annual/quarterly reports)	Buy: steady YoY growth. Caution: flat growth. Avoid: consistent decline.
Operating Income / EBIT	Shows operational profitability before interest & taxes (core business health).	Income statement	Buy: rising EBIT (Earnings Before Interest and Taxes) and margins. Caution: falling EBIT due to rising OPEX (Operating Expenses). Avoid: persistent operating losses.
Net Profit (PAT)	Bottom-line profit after all expenses — used for EPS and retained earnings.	Income statement	Buy: positive & growing PAT. Caution: volatile PAT. Avoid: recurring net losses.
EPS (Earnings Per Share)	Profit per ordinary share — measures shareholder value creation.	Company reports / NSE filings	Buy: rising EPS. Caution: EPS rising due to share buybacks, not operations. Avoid: falling EPS.
DPS (Dividend Per Share)	Cash returned to shareholders — reflects distribution policy and cash availability.	Financial report / NSE disclosures	Buy: consistent/growing DPS funded by FCF (Free Cash Flow). Caution: one-off dividend. Avoid: dividends funded by debt.

Example: If company X shows Revenue ↑ 8% YoY, EBIT ↑ 15% and EPS ↑ 12%, it indicates improving operational efficiency — a positive sign when combined with modest debt.

🧮 2. Balance Sheet Strength

Parameter	Purpose	Source	How to Interpret
Total Assets	Size and resource base of the company — used for ROA & asset turnover.	Balance sheet	Buy: steady asset growth supporting revenue. Caution: assets growing faster than revenue. Avoid: impairment or unexplained jumps.
Total Equity	Owner capital + retained earnings — base for ROE.	Balance sheet	Buy: steady increase in equity from retained profits. Caution: equity falling due to losses. Avoid: recurring erosion of equity.
Total Debt	Borrowed funds — measures leverage and interest burden.	Balance sheet (short + long term debt)	Buy: moderate debt at manageable servicing cost. Caution: rising debt when earnings lag. Avoid: heavy gearing vs peers.
Book Value per Share (BVPS)	Net asset value per share used for P/B comparisons.	Balance sheet / NSE	P/B < 1 may signal undervaluation; P/B > 3 could be expensive.

💧 3. Cash Flow Statement Health

Parameter	Purpose	Source	Interpretation
Operating Cash Flow (OCF)	Real cash generated from core operations (quality of earnings).	Cash flow statement	Buy: positive & growing OCF. Caution: OCF volatile. Avoid: negative OCF with reported profits.
CapEx	Spending to maintain/expand assets — impacts FCF.	Cash flow statement	Buy: CapEx aligned with revenue growth. Caution: heavy CapEx without returns. Avoid: CapEx funded by unsustainable borrowing.
Free Cash Flow (FCF)	OCF − CapEx = cash available for dividends, debt paydown, buybacks.	Derived (or reported)	Buy: positive FCF. Caution: FCF trending down. Avoid: persistent negative FCF.

💹 4. Market Data

Parameter	Purpose	Source	Interpretation
Share Price	Market valuation — used for computing P/E, P/B, market cap, etc.	NSE live prices / broker platforms	Compare price moves against fundamentals & sector.
Market Cap	Price × shares outstanding — company size.	NSE	Large cap ≠ automatically safe — check earnings base.
Shares Outstanding	Denominator for EPS and basis for market cap.	Company reports / NSE filings	Watch for dilution (new issues) or reduction (buybacks).
Dividend Yield	Annual dividends divided by price — income measure.	NSE / company disclosures	Moderate yield is attractive; very high yield may be a trap (price collapse).

📈 5. Valuation Ratios

Ratio	Purpose	Formula / Source	How to Interpret
P/E Ratio	How much investors pay per unit of earnings.	Price / EPS	Buy: lower than sector avg and supported by growth. Caution: low P/E with falling earnings. Avoid: high P/E with no growth.
P/B Ratio	Price relative to book value per share.	Price / BVPS	P/B < 1 suggests value; very high P/B needs growth justification.
P/S Ratio	Useful for companies not currently profitable.	Market Cap / Revenue	Compare to sector; useful in early-stage or turnaround firms.
EV/EBITDA	Enterprise value relative to operating earnings.	(Market Cap + Debt − Cash) / EBITDA	<10 often attractive; >15 expensive; use for cross-border comparisons.
PEG / PEGY	Growth-adjusted valuation (PEG) and growth + dividend (PEGY).	(P/E) / EPS Growth ; (P/E) / (EPS Growth + Dividend Yield)	<1 indicates price may not fully reflect growth (good value).
DCF / Graham / DDM / P/FCF	Intrinsic value models & cash-flow based measures.	DCF model; Graham formula; DPS/(r−g); Price/FCF	If intrinsic value > market price → margin of safety; use multiple methods for confirmation.

Valuation Example:

If Company Y trades at P/E = 8x while the sector average is 12x, and Company Y has EPS growth of 10% (PEG = 0.8), this suggests relative undervaluation — provided earnings are sustainable.

💰 6. Profitability Metrics

Metric	Meaning	Formula / Source	Interpretation
ROE	Return on equity	Net Income / Shareholders' Equity	>15% = strong use of capital
ROA	Return on assets	Net Income / Total Assets	>7% = efficient for many industries
Net Margin	Profitability after all costs	Net Profit / Revenue	>10% = solid; <5% = weak
Operating Margin	Core business profitability	EBIT / Revenue	Higher margins = competitive advantage
EPS Growth	Trend of earnings per share	Derived from historical EPS	Sustained positive growth is desirable

💵 7. Cash Flow Strength

Metric	Purpose	Source	Interpretation
FCF	Cash left after CapEx	OCF − CapEx	Positive FCF = capacity to pay dividends, reduce debt, buyback shares
Cash Flow to Debt	Ability to repay debt from operations	OCF / Total Debt	>0.3 considered healthy in many sectors

💸 8. Dividend Ratios

Metric	Meaning	Formula	Interpretation
Payout Ratio	Portion of earnings paid as dividends	DPS / EPS	<70% often sustainable — sector dependent
Retention Ratio	Portion of earnings retained for reinvestment	1 − Payout Ratio	High retention means funds are reinvested into the business

⚖️ 9. Leverage Ratios

Metric	Meaning	Formula	Interpretation
Debt / Equity	Capital structure	Total Debt / Total Equity	<1 conservative; >2 risky depending on sector
Interest Coverage	Ability to cover interest	EBIT / Interest Expense	>3 typically safe
Debt / EBITDA	Leverage relative to earnings	Total Debt / EBITDA	<3 comfortable; >4 needs scrutiny

💧 10. Liquidity Ratios

Metric	Meaning	Formula	Interpretation
Current Ratio	Short-term solvency	Current Assets / Current Liabilities	>1.5 comfortable
Quick Ratio	Acid test (excl. inventory)	(Current Assets − Inventory) / Current Liabilities	>1 indicates good immediate liquidity

⚙️ 11. Efficiency Ratios

Metric	Meaning	Formula	Interpretation
Asset Turnover	Sales produced per unit of assets	Revenue / Total Assets	Higher = more efficient use of assets
Inventory Turnover	How fast inventory moves	COGS / Average Inventory	High turnover = fast selling; low may indicate obsolescence
Receivables Turnover	Speed of collecting credit sales	Revenue / Average Receivables	High = efficient collection

🚀 12. Growth Indicators

Metric	Meaning	Source	Interpretation
Revenue CAGR (3–5yr)	Compound annual growth rate of revenue	Multi-year income statements	>10% = healthy growth for many sectors
Book Value Growth	Equity per share growth	BVPS YoY	Rising BVPS indicates retained earnings compounding shareholder value

📊 13. Momentum Indicators

Metric	Meaning	Source	Interpretation
3M / 6M / 12M % Change	Short-to-medium term price trend	NSE charts / broker charts	Positive trend supports fundamentals; sharp moves need confirmation
RSI / MACD	Technical momentum & trend signals	TradingView / Charting tools	RSI 30–70 normal; MACD cross up = bullish signal

⚠️ 14. Risk Metrics

Metric	Meaning	Source	Interpretation
Beta	Volatility compared to market index	Trading platforms / data providers	<1 = less volatile than market; >1 = more volatile
Standard Deviation	Price volatility measurement	Calculated (Excel)	Lower = steadier returns

🧠 15. Ownership & Governance

Metric	Meaning	Source	Interpretation
Institutional Holding %	Proportion held by funds and institutions	NSE disclosures / annual report	High = institutional confidence (positive)
Insider Buys / Sells	Management and director trading activity	CMA filings / company announcements	Insider buying = bullish; heavy selling = caution
Audit Quality, Board Independence, Transparency	Governance and disclosure standards	Annual report, auditors’ notes, ESG reports	Clean audit & independent board = trusted governance

🧩 Quick Checklist — When to Consider BUY

Revenue, EPS and FCF are rising.
Debt levels are moderate and interest coverage is healthy.
Valuation ratios (P/E, EV/EBITDA, P/FCF) are reasonable vs peers.
Dividend is sustainable (Payout < FCF) and governance looks solid.

📌 Final Notes & Practical Example

Practical example (mini case)

Company Z reports:

Revenue growth: +12% YoY
EBIT: +18% (margins expanding)
OCF: positive and growing; FCF positive
Debt/Equity: 0.6; Interest coverage: 6×
P/E: 9× vs sector 13×; PEG: 0.8

Interpretation: Fundamentals are improving, cash flow is strong, leverage is moderate and valuation is attractive — this fits a "buy" profile if no governance red flags exist.