Determining the price to value of a stock

Imagine you want to buy a propertyLand and buildings held for use, rent, development, or capital appreciation.. Your agent finds a good one at a great location but there is one problem, the ask price exceeds the estimated value of the property. If you buy it at that price, you will be overpaying for the property.

Investing in stock works the same way. A good stock from a great company can still be a bad deal if you are overpaying.

The key to finding an appropriate price is to look for stocks trading below their intrinsic valueAn estimate of an asset's underlying economic worth based on expected cash flows, assets, or earning power.. To determine the intrinsic value of a stock, we’ll analyze its price in relation to its earnings, sales and net assets.

By the end of this section, you should be able to:

Understand how price-to-earnings ratios support valuation
Determine if its growth rate justifies the price
Examine if the stock is a good bargain based on how it generates profit from its assets.

#Understanding Price-to-Earnings (P/E ratios):

P/E ratio tells you how much investors are willing to pay for every 1 naira of the company’s net profit. A high P/E ratio compared to its industryA more specific group of companies with closely related products or services. average means that the stock may be overvalued or that investors may expect better margin and higher growth.

A lower P/E ratio suggests that the stock may be undervalued or that investors may be pessimistic.

To confirm if the P/E ratio is a buy signal, we will analyze the company’s 3-5 year trend on revenue, net profit marginNet income expressed as a percentage of revenue. and debt levels. A low P/E ratio can be a good buy if it is accompanied by a consistent increase in revenue and net profit margin, and a debt-to-equity ratioDebt divided by shareholders' equity. below its industry average.

The P/E ratio is calculated by dividing the current share priceThe market price at which one share is quoted or traded. by the earnings per shareNet income attributable to ordinary shareholders divided by weighted average ordinary shares. (EPS).

P/E = Current Share Price / Earnings per share (EPS)

This means that if the current share price of OKOMUOIL is 1,605 while its EPS is 66.6, its P/E ratio is: 1605/66.6 = 24.1

You can also compare the P/E ratio for the last 3-5 years and then with its industry average.

OKOMUOIL P/E ratio is at its highest since 2016.

The average industry P/E ratio is 15.4. This means that OKOMU has a high P/E ratio.

Let’s check if the market expectation based on its P/E ratio is being fulfilled.

#i. Revenue:

If you click the revenue figure on the dashboard, you’ll be led to a page where the revenue is compared from 2016-2025.

OKOMUOIL revenue has been increasing since 2016.

#ii. Debt-to-equity (D/E) ratio:

Debt-to-equity ratio shows how the company funds itself. It tells us how much debt the company uses for every 1 naira of shareholderA person or entity that owns one or more shares in a company.’s equity.

If a company’s D/E ratio is above its industry average, it means it is using more borrowed money than its equity to fund its operation. This can be a bold move if it wants to reduce the tax. It can also be a red flagA warning sign that merits further investigation before investing. because if the loan is interest-bearing it will increase expenses and affect its profit.

A D/E ratio below its industry average shows financial stability and low risk.

D/E ratio = (Total Debt (liabilities)/Total AssetsThe sum of resources controlled by an entity that are expected to provide economic benefits.) × 100

This means that if the total debt of a company is 102 million naira and its total assets is 1 billion naira, its D/E ratio will be:
(102 million/1 billion) × 100 = 10.2%

The industry average is 61.7% while the D/E of OKOMUOIL is 41.6%. It is below average, hence is low risk.

#iii. Net profit margin:

The net profit margin tells you how much the company makes on every 100 naira in sales.

Net profit margin = (Net Profit/ Total Revenue) × 100

From earlier data, we saw that OKOMUOIL’s net profit of 2025 was 63,534,217 while of 2024 was 39,957,745. The revenue of 2025 was 198,152,877 while of 2024 was 130,060,979.

This means the net profit margin of 2025 is (63,534,217/198,152,877)× 100 = 32%.

For 2024, the net profit margin is (39,957,745/130,060,979) × 100 = 30.7%

This means that for every 100 naira in sales, the company made 32 naira in profit in 2025 and 30 in profit in 2024. The margin has been increasing.

To confirm the trend, analyze its net profit margin between 3-5 years.

From the data provided, we’ve seen that the analysis supports the market’s expectation of more growth and hence a higher P/E ratio.

#Understanding Price/Earnings Per Share-to-Growth (PEG):

PEG assesses the price in relation to its growth rate. It tells you if the company’s growth rate justifies its price. PEG is another way to analyze if the market expectation based on the P/E ratio of a stock is accurate.

A PEG less than 1 means that the company may be undervalued as it is growing faster than its price.

A PEG equal to 1 shows that the price matches its growth, hence the stock is valued fairly.

A PEG greater than 1.5 shows that the stock may be overvalued as the price is more expensive than its growth rate.

PEG = P/E ratio / Annual EPS

To calculate the PEG of a stock, divide the P/E ratio by the annual EPS growth rate.

According to the data provided, we know that OKOMUOIL P/E ratio is 17.74.

If you click the EPS figure, you’ll be led to a page where the EPS since 2017 is listed. To calculate the EPS growth, subtract the previous year’s EPS from current year’s EPS. Divide the result by the previous year’s EPS and multiply by 100.

The current year’s EPS is 66.6 and the previous year’s EPS is 41.89. This means that the EPS growth rate for 2025 is 58.98%

To calculate the PEG, we’ll take this percent as a whole number. This means that the P/E is 17.74 and the annual EPS growth rate is 58.98. The PEG of 2025 is 0.3. This is less than 1, meaning that the company may be undervalued.

#Understanding Price-to-Sale (P/S) ratio:

P/S ratio is the amount investors pay for every 1 naira made in sales. Combined with the P/E ratio, it shows us if the demand of the company’s product is profitable.

P/S ratio of a stock is undervalued if investors are paying less than 1 naira for every 1 naira of sales. It is a fair valueAn estimate of an asset's appropriate value under specified assumptions or accounting standards. if investors are paying between 1 naira to 4 naira for every 1 naira of sales. It is overvalued if investors spend more than 4 naira for every 1 naira in sales. This is the general rule of thumb but it may differ in some industries. For instance, low-margin industries which generate large volumes of revenue but keep a small fraction as profit (like banks) have low P/S as the industry average (1.58). A P/S ratio of 3 or 4 in this industry is considered overvalued rather than fair valued.

If the P/S is overvalued or at fair value, it means that investors are willing to pay more for sales. This means the market expects the demand of the product to increase and the company to make more sales.

If the P/S is undervalued, it means the investors either overlooked the stock or they do not believe in the future demand of the product and hence spend less for its sales.

P/S ratio = Market Cap/Total Revenue

This means that if the market cap is 1.4 trillion and the total revenue is 198.1 billion, its P/S is:
1.4 trillion/198.1 billion = 7.1

OKOMUOIL’s P/S ratio is 5.81 while its industry average is 7.98. This means that the stock is undervalued. We’ll check its P/E ratio to confirm if this means that the stock is merely overlooked or if investors do not believe in its future demand.

The stock has a high P/E ratio that is accompanied by a high net profit margin. This means that OKOMUOIL has high demand accompanied by high profitability. Investors may be overlooking it. This makes it a good bargain.

#Understanding Price-to-Book (P/B) ratio:

P/B ratio tells us if the company is backed by hard assets and how much investors pay for every 1 naira of these assets.

P/B ratio = Market Cap/Total Shareholders Equity
Alternatively, you can calculate it using:
P/B ratio = Current Share Price/Book Value per ShareOrdinary shareholders' equity divided by ordinary shares outstanding.

The total shareholders equity and book value per share are listed under the equity section of the balance sheet on StockAnalysis.

This means if the market cap is 1.4 trillion and total shareholders equity is 56 billion, the P/B ratio of the stock is:
1.4 trillion/56 billion = 25

A higher P/B ratio than its industry average indicates that investors are willing to pay more than the value of its assets. While this means that the company is overvalued, it could also mean that investors believe in its growth as the company is generating more profit with less assets.

To confirm if a company is overvalued or worth the hype, pair the P/B ratio with its Return on Equity (ROE). ROE is measures of how the company generates profit from equity.

ROE = (Net profit/Shareholder’s Equity) × 100

If the net profit is 63.5 billion and the shareholders equity is 56 billion, the ROE is:
(63.5 billion/56 billion) × 100 = 113

A high P/B accompanied by a high ROE (higher than industry average) means that the company is a good bargain as it is using 1 naira of assets to generate more profit than its competition.

A high P/B accompanied by a low ROE (or the same as the industry average) means that the company is overvalued as investors are spending more for less profit.

A low P/B accompanied by a high ROE means that the company is undervalued even while generating more profit from its assets. This is a good bargain.

A low P/B accompanied by a low ROE means that the company is generating less profit from its assets and investors are not willing to pay more for it. This is a red flag.

OKOMUOIL P/B ratio is higher than its industry average. It is 27.3 while its industry average is 1.9.

Its ROE is also higher than the industry average. OKOMUOIL ROE is 113 while the industry average is 8.2

This means that the stock is a good bargain as it uses 1 naira to generate more profit than its competition.

#Final Thoughts

Succeeding in the stock market is not about finding a company offering cheap stocks. It is buying into a great business that is offered at a fair or undervalued price. Price is the final filter that helps determine if a stock is a good investment.

Your first question should be, “how good is the company?” Confirm that the company is selling products its market needs and its management team has industry experience. After this, check its financials. Does its earnings match its revenue? Does it have sufficient liquidity for seamless entry and exit? What is its debt level? A great company must be backed by solid financial record.

Only after the stock passes the first two criteria should you analyze its price. One ratio cannot give you the full picture of its valuation. The ratios should complement each other. A stock with a high P/E ratio should also have a low PEG or a PEG equal to 1 to justify its price. A high P/B is a good sign only if it is accompanied by a high Return-on-Equity (ROE).

It is also necessary to compare these values to its industry average. This shows you its strength compared to its competition.

But remember, no investment is risk-free. These metrics do not eliminate risk, but help to reduce avoidable mistakes and make informed decisions.