Friday, January 15, 2016 12:24 PM / TheAnalyst
Nigerian Stock Market trades and operates just like any other stock markets around the globe. Rather than buy a stock based on the fact the price is low or based on any other personal reasons, investors make professional findings and PE ratio is one of the important ratios to view.
They help portray how the market values the stocks in question and also help to evaluate how expensive or cheap the stock is at any given time.
In a period of economic cycle, industries that are thus affected by the cycle are considered to usually trade at lower PE ratio than other defensive sectors which are unaffected.
Analysis revealed that Stocks of FMCGs were performing during the extended bearish trend after the 2008 market bubble.
Also, companies with good track records are said to have a higher P/E relative to a company which has had an erratic performance while the future growth of companies which is the most important factor built in PE ratio is another factor.
While a high P/E suggests that investors are expecting higher earnings growth in the future compared to companies with a lower P/E, a 100x PE ratio is considered a time bomb waiting to blow.
On the other hand, a low P/E can indicate either that a company may currently be undervalued or that the company is doing exceptionally well relative to its past trends.
Based on best practice, average market P/E ratio is expected to be about 20-25 times earnings while companies that are losing money or declaring losses do not have a P/E ratio.
Available data reveals that SEPLAT, UNILEVER and CADBURY recorded 1608.59, 1160.79 and 1072.21 PE ratios respectively which are far above best practice. Also, CHAMPION, GUINNESS and thirty-five (35) other stocks recorded between 604.06 and 26.07 PE ratios as at 8th January, 2016.
Eleven (11) stocks recorded PE ratios that are within the 20-25 times earning benchmark. The stocks include; MAYBAKER, ETRANZACT, LIVESTOCK, ROYALEX, CHELLARAM, TOTAL, FORTISMFB, CAP, ALEX, VITAFOAM and ABCTRANS .
Seventy-eight (78) other stocks have PE ratios that are below the benchmark. MANSARD and TRANSCOHOT top the list of such stocks with 18.21 and 17.84 PE ration while UNITYBNK and ANINO recorded the least PE ratio of 1.07 and 1.10 in that order.