The 5 Questions to Ask Before Buying Any Nigerian Stock

Most new investors ask one question before buying a stock: "Has the price gone up?"

That is the wrong starting point.

A rising share price tells you what other people are doing. It does not tell you whether the underlying business is healthy, whether its earnings are sustainable, or whether you are paying a sensible price for a share in it.

Fundamental analysis exists to answer the better question — and it can be reduced to five questions. Work through these before you buy any Nigerian stock on the NGX, and you will already be doing more analysis than most retail investors ever do.

1. What Does the Company Do — and Can You Explain How It Makes Money?

This sounds obvious. It is also the step most beginners skip.

Before you look at a single ratio, you should be able to answer, in one or two sentences: What does this company sell? Who buys it? Where does its revenue actually come from?

If you cannot explain how a company makes money, you are not investing — you are speculating.

Take two Nigerian companies in different sectors. A bank makes money mainly from interest income on loans and fees on transactions. A consumer goods company makes money from selling products at a margin above production cost. A telecom earns from data, voice and increasingly fintech services layered on its network.

Each of these businesses responds to different pressures — interest rates for the bank, input costs and consumer spending power for the consumer goods company, data pricing and regulation for the telecom. You cannot judge whether a 20% revenue increase is good news or a red flag until you understand what is actually driving that company's income.

Before moving on, ask: What are the company's major revenue sources? What are its major costs? Who are its real competitors?

2. Is the Business Financially Healthy?

Once you understand the business, turn to the numbers — but resist the urge to jump straight to a P/E ratio. Financial health has four parts, and they need to be checked together.

Is revenue growing? And more importantly, why. Revenue can rise because of higher volumes, higher prices, an acquisition, or currency effects. A naira-denominated revenue increase driven mainly by exchange-rate depreciation is a very different story from one driven by genuine volume growth.

Are profits sustainable? Revenue growth means little if margins are shrinking underneath it. If revenue rises 50% but gross margin falls from 30% to 20%, the company is generating more sales but keeping less of every naira.

Is the company generating cash? Profit and cash are not the same thing. A company can report a healthy profit on paper while its receivables balloon and actual cash from operations shrinks. Whenever profit and operating cash flow move in opposite directions for more than one reporting period, treat it as a serious question mark, not a footnote.

Is debt manageable? Look at how fast debt is growing relative to earnings, and whether interest costs are eating an increasing share of operating profit. This matters more in Nigeria than in many markets, given how sharply borrowing costs can move with monetary policy.

3. Does the Company Have a Competitive Advantage?

Profitable today is not the same as profitable for the next five years. The question that separates a good business from a mediocre one is: can competitors easily take its customers or erode its margins?

A genuine competitive advantage — sometimes called an economic moat — can come from several sources: a strong brand that commands loyalty and pricing power, an extensive distribution network that is expensive to replicate, economies of scale that let a company produce more cheaply than smaller rivals, regulatory licences that restrict new entrants, or switching costs that make it inconvenient for customers to leave.

Picture two companies in the same Nigerian industry. Company A has built brand loyalty and a distribution network that took a decade to establish. Company B sells a near-identical product and competes mainly on price. Both may show similar profit margins this year. But Company A's position is far more durable — Company B's profitability is one price war away from disappearing.

When you research a stock, don't just ask "is it profitable?" Ask "why is it profitable, and can that reason survive a determined competitor?"

4. What Could Go Wrong?

Every investment thesis needs a stress test. This is where most enthusiastic investors go quiet — nobody wants to list reasons not to buy a stock they're excited about, which is exactly why this step matters.

Work through the categories systematically:

• Financial risk — Is debt at a level that could become a problem if earnings dip or rates rise further?
• Operational risk — Does the company depend heavily on one product, one customer, one plant, or one key executive?
• Regulatory risk — Nigerian banks, telecoms, oil and gas companies and financial services firms are all exposed to policy and regulatory shifts that can materially change the earnings picture almost overnight.
• Economic risk — How exposed is the company to inflation, naira depreciation, or interest-rate changes? A company with significant foreign-currency debt and mainly naira revenue carries a very different risk profile from one earning in dollars.
• Industry risk — Is the industry itself growing, mature, or in structural decline?

One risk factor rarely sinks a good investment case on its own. What matters is whether several risks are stacking up in the same direction at the same time.

5. Am I Paying a Sensible Price?

You can answer the first four questions perfectly and still lose money — by overpaying.

An excellent business bought at an excessive price can be a poor investment. A mediocre business bought cheaply enough can sometimes outperform expectations. Valuation is where quality and price finally meet.

This doesn't require a complex valuation model to start. Begin with straightforward context: How does the company's P/E compare with its own historical average? How does it compare with direct competitors in the same sector? Does the current price already assume aggressive future growth — and is that growth realistic given what you learned in Questions 1–4?

A P/E of 8x is not automatically cheap, and a P/E of 25x is not automatically expensive. The number only means something once you compare it against the business quality, growth prospects and risk profile you've just spent four questions establishing.

Put the Five Questions Together

None of these questions works in isolation. A great answer to Question 3 doesn't rescue a bad answer to Question 5. A cheap valuation doesn't compensate for a business with no competitive advantage and rising debt. Fundamental analysis is the discipline of holding all five in your head at once, not picking the one that flatters the stock you already want to buy.

The bottom line: before your next trade on the NGX, don't start with "how much has the price moved?" Start with these five questions. If you can't answer all of them with confidence, you haven't finished your homework yet — and the market will eventually remind you why that matters.