Is a Stock Cheap or Expensive?

Relative Valuation: Cheap vs Expensive

A common mistake new investors make is thinking a stock with a low share price is "cheap" and one with a high share price is "expensive." The absolute price of a share tells you nothing about value. A KES 5 stock can be wildly overvalued while a KES 500 stock can be a bargain.

Price vs Value

Price is what you pay. Value is what you get. The goal of fundamental analysis is to determine whether the price you are paying reflects fair value, or whether the stock is overpriced or underpriced relative to the company's fundamentals.

Relative Valuation: Comparing Peers

The most practical approach for NSE investors is relative valuation — comparing a stock's ratios to its sector peers:

1. Gather the P/E, P/B, dividend yield, and ROE for all companies in the sector (Stockr displays these on each stock page).
2. Identify the sector average for each ratio.
3. Compare your target stock to the sector average.

Example: Banking Sector Comparison

Imagine the following simplified data for three banks:

• Equity Group — P/E: 6, P/B: 1.5, ROE: 25%, Yield: 4%
• KCB Group — P/E: 4, P/B: 0.8, ROE: 18%, Yield: 6%
• Co-op Bank — P/E: 5, P/B: 0.9, ROE: 16%, Yield: 5%

KCB appears cheapest on P/E and P/B, but Equity has the highest ROE, suggesting it deserves a premium valuation because it generates better returns for shareholders. Neither is definitively "cheap" or "expensive" without understanding why the ratios differ.

Key Principle

A stock is not cheap just because its ratios are low. It is cheap if its ratios are low relative to peers AND the company's fundamentals justify a higher valuation. Always ask why a stock is priced the way it is.