How to know good stocks and an overvalued stock as an investor

When you're investing in the stock market, your goal is very simple. You want to buy good stocks at, buy good stocks at a good price. On the surface, you cannot know whether a stock is overvalued, undervalued or fairly valued. You have to do some analysis. One of the ways to potentially know whether a share is overvalued, undervalued or fairly valued relative to its competitors is the price to earning ratio. This video has a bit of calculation, but I will make it as simple and seamless as possible. Let's take the cement industry in Nigeria for example. There are three companies currently listed on the NGX: Dangote Cement, Bouygues Cement, and Wapco or Lafarge. Those are the three listed companies. If you want to buy shares in any of those companies, check which one would, check which one would give me more for my money. You now list out and this is not limited to cement industry alone. You can use it for any industry. Dangote Cement for any industry. I look for the price to earning ratio. Price over earning, price over earning. There is market price of the share. Currently, Dangote Cement is currently trading at 1,155 Naira. On top, the earning involves another level of calculation. So I will use earnings per share for that earning. For me to know that, I need to take a journey into the books of the company, which in this case is 2025 financials. And look for the net income or net profit of the company. In 2025, Dangote declared a net profit of 1 trillion, slightly above 1 trillion. And I will look for the total outstanding shares of the company. That talks about the number of shares that is held by all shareholders of the company. Dangote Cement, total outstanding shares as at today is around 16 billion. So I would divide 1 trillion / 16.8 billion. 1 trillion / 16.8 billion. That would give me about 60 Naira. 60.6 Naira. So that is my EPS, earnings per share. Now I've gotten 60. A 1,150 / 60. A 1,150 / 60. That should give me around 19 times. What that means is, for every one Naira of Dangote Cement earnings or profit, investors, current investors are willing to pay 19 Naira for one Naira of the company's profit. Why? Simply because investors expect that the company would exceed expectations in the future. And this is not Nigerian companies alone. Even national companies show the same trend. Example, Apple. Apple is one of the most valuable companies on Earth right now. Apple is currently valued at over $4 trillion. If you do P to E ratio for Apple, you realize that it is almost 35 times. Means for every $1 of Apple's profit, investors are willing to pay $35. My first thought when I saw the P/E ratio of Apple, like Apple is no longer a company in the growth phase. Usually when a company starts, start-up phase, growth phase, maturity and decline. If maturity and decline, if you don't do anything at that maturity phase, then the company will decline. But if you do something, if you innovate, you can potentially take it up another notch, or to another level. So Apple is at maturity where earnings have stabilized. You can predict Apple's profit. The earnings have stabilized. So why are investors still pricing it at 35 times its earning? Simple. Because they expect that the company will continue to grow. And when you think about Apple, normally it has a loyal fan base everywhere. I know some of you right now, you have iPhone 17 Pro Max, and you're just waiting for iPhone 18 to once it is released. Nothing wrong with iPhone 17. No, but you trade it in and get iPhone 18. It's like that everywhere in the world. Loyal fan base and not only that, they have an ecosystem of products that is doing well. And also, they are now investing a lot into AI and the new technology to of course continue to grow that business. So that's how to compare a company relative to competitors in the same industry using P to E ratio. I hope this video makes sense to you. I will see you in the next one.