Page 43 - SACCO STAR ISSUE 37
P. 43

SMART INVESTMENT

                                               By Johnson Nderi

In 2008, telecoms firm Safaricom,              These three are vital to understand the       There are many other indicators that one
       made its entrance at the Nairobi        performance of a company. Further, it is      can look at as well such as indebtedness
       Securities Exchange (NSE) with a        important to compare these numbers over       .This refers to how much debt the
       share trading at Ksh 5. Today, a share  time so that you can have an idea about       company has taken versus its total assets.
is trading at Ksh 20. This reveals an 18.92    trends in the company. For instance; what     Investment in research and development
percent growth over the last 8 years           does the trend of sales in Company A look     is a key indicator on whether the company
tremendously increasing the purchasing         like? Are they upward or downward? What       invests for the future.
power of the initial buyers.                   does the trend of expenses look like? Are
                                               they rising or coming down? What are the      After considering all these factors,
During the last 8 years, Safaricom has         trends in the margins? Are the margins        knowing the appropriate price is
also issued dividends to its members.          improving or weakening? These trends          important. The company can be great
Dividends are payments to shareholders         can tell you a lot on the outlook of the      but if you buys its share expensively,
from either current or historical earnings.    business.                                     then it will take longer to get a return on
Therefore Safaricom’s returns are                                                            your investment. Conversely, if you buy
more than 20 percent, factoring in the         The most important indicator for              an affordable share, it will take a shorter
dividends that shareholders have received      companies is profits and profitability.       period to make a return.
over the time that it has been listed. The     After all, companies are set up to generate
total return of an investment therefore        profits. Strong growth in profits and         The shares of good companies usually
covers both dividend and share price           profitability means better share prices.      trade at a premium on book value and at a
appreciation.                                  The two terms seem similar but they are       higher multiple on earnings than those of
                                               actually different concepts. Profit is a      weaker companies. It is up to an investor
The whole idea of investing is to use          straight forward term meaning revenues        to determine which companies he thinks
current resources to produce more              less expenses. However, profitability is      are overpriced and which ones he thinks
resources for future consumption. As           a more interesting term. It compares the      are underpriced. To easily find this out,
seen in the illustration above shares offer    ratio between profits and shareholder’s       compare company’s price earnings ratios.
a very good opportunity to achieve this        equity. Shareholder’s equity can be found     Price earnings ratios (PE ratios) are usually
objective.                                     on the balance sheet and it is a sum of       price per share as a ratio of earnings per
                                               capital and reserves. Companies with          share (total earnings/total number of
The use of the Safaricom share may look        strong profitability have high returns on     shares). The most successful companies
simple but it is anything but that. There      shareholder’s equity. This analysis should    have high PE ratios while struggling
are companies that have lost a lot of value    be done over time to determine trend.         companies typically have low price
over the same duration. For instance;                                                        earning ratios.
Mumias Sugar, Kenya Airways and Uchumi         After profitability, sales are the next most
Supermarket have lost value as they            important indicator. A company that is        Johnson Nderi is the Corporate Finance and
reported low returns. Therefore, it is         constantly growing its sales revenues,        Advisory Manager at ABC Capital.
important to do research for two reasons       whether by selling to more people or by
namely to look for good companies and to       increasing the number of products on
avoid bad companies.                           sale, is a growing company which is good
                                               for investors. However, this new growth
To do research on companies, a basic           should not come at the expense of profits.
understanding of financial accounting is       Consequently, the margins of the new
important. It is fundamental for one to        products should, over time, translate to
understand what an income statement is,        higher profits and higher profitability.
what a balance sheet is and what a cash
flow statement is.

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