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The Business Behind the Price

Value InvestingNSEInvesting Basics

There is a question that every stock buyer should ask before parting with their money, and yet remarkably few do: what am I actually buying? The answer seems obvious – shares, of course. But that response mistakes the certificate for the thing it represents. A share is not the product. It is a claim on something far more substantial. When you buy shares in a company listed on the Nairobi Securities Exchange (NSE), you are buying a piece of that company's business. Not a metaphorical piece, not a symbolic stake, but an actual fractional ownership of everything the company possesses and everything it earns. This is not poetry. It is law. The more shares you hold, the larger your slice.

Consider Equity Bank. If you own 1,000 shares out of the roughly 3.77 billion shares outstanding, you own approximately 0.0000265% of the bank(Group Holdings, 2024). That percentage may seem trivial but it is a percentage of something enormous – every branch from Nairobi to Kisumu, every loan on the books, every shilling sitting in the vaults, every ATM humming in a shopping mall. Your 1,000 shares represent a claim, however small, on all of it. And when the bank earns a profit, a portion of that profit belongs to you, whether it is paid out as dividends or retained to grow the business further.

This claim is the reality that price-watchers tend to forget. They see the stock as a thing that goes up or down, a vehicle for speculation. They do not see the factories, the inventory, the customer relationships, the accumulated expertise of the workforce. But these are the source of all value. The stock price is merely a reflection – sometimes accurate, often distorted – of what these underlying realities are worth.

Assets: What the company owns

Every company owns things. These are called assets, and they come in many forms. Some assets are tangible. Land and buildings, machinery and vehicles, inventory sitting in warehouses waiting to be sold. Kenya Breweries owns brewing equipment. Bamburi Cement owns kilns and quarries. Kenya Airways owns aircraft, or at least holds leases on them. These physical assets have values that exist independent of what the stock market thinks on any given Tuesday.

Other assets are financial. Cash in the bank is an asset. So are investments in other companies, money owed by customers, and prepaid expenses. When you look at a company's balance sheet, you will find these items listed and totaled. The sum represents everything the company owns.

But ownership is only half the picture. Companies also owe money – to suppliers, to banks, to bondholders, to employees. These are liabilities. The true measure of what belongs to shareholders is what remains after all debts are paid. This remainder is called shareholders' equity, or book value. It is the net worth of the business, and by extension, it is your net worth as a part-owner.

If a company owns assets worth Ksh. 10 billion and owes debts of Ksh. 6 billion, the shareholders' equity is Ksh. 4 billion. Divide that by the number of shares outstanding and you arrive at the book value per share – the accounting value of each ownership unit. This number tells you, in crude terms, what your share would be worth if the company stopped operating today, sold everything, paid off all debts, and distributed the remainder to shareholders.

Earnings: What the company makes

Assets tell you what the company owns. Earnings tell you what it does with those assets. A company exists to generate profit. It buys raw materials, adds value through labor and processes, sells the finished product, and pockets the difference between revenue and costs. What remains after all expenses, taxes, and interest payments is net income – the profit that belongs to shareholders.

Earnings matter because they are the engine of wealth creation. A company that consistently earns profits can do three things with the money: pay dividends to shareholders, reinvest in the business to grow future earnings, or pay down debt to strengthen the balance sheet. All three benefit the owner. Dividends put cash in your pocket. Reinvestment increases the value of your stake. Debt reduction makes the company safer and more valuable.

Safaricom earned Ksh. 69.8 billion in net income in the financial year ending March 2025(Safaricom PLC, 2025). That profit belonged to the shareholders – all 40 billion shares worth of them. Divide the earnings by the shares, and you get earnings per share: roughly Ksh. 1.74(Safaricom PLC, 2025). That number represents your cut of the company's annual profit for every share you own. Buy 1,000 shares, and you have a claim on Ksh. 1,740 of Safaricom's annual earnings. So, buying a stock is buying this underlying value. You are not betting on a number. You are buying a stream of future profits, generated by real assets. The question is simply whether the price you pay for that stream is reasonable.

The Balance Sheet and Income Statement

These concepts – assets, liabilities, equity, earnings – are not abstractions. They are reported in financial statements that every listed company must publish. The two statements that matter the most for value investors are the balance sheet and the income statement.

A company's balance sheet is a snapshot of what the company owns and owes at a specific point in time. Assets on one side, liabilities and shareholders' equity on the other. From it, you can extract the book value per share – a number that tells you what the company is worth on paper, after all debts are accounted for.

The income statement covers a period of time, usually a quarter or a year. It shows revenue at the top, subtracts various costs and expenses, and arrives at net income at the bottom. From the income statement, you can extract earnings per share, which tells you how much profit the company generated for each share outstanding.

These two numbers – book value per share and earnings per share – are the raw materials of value investing. In the next essay, I will show you exactly how to find them, where to look, and what they tell you about a company's worth. For now, the point is simply this: they exist, they are published, and they are available to anyone willing to look.

Why this distinction matters

Understanding that you are buying a business, not a ticker symbol, changes everything about how you approach the market. The price-watcher asks: "Is this stock going up?" The business owner asks: "Is this company earning money? Are its assets growing? Is the price I am paying reasonable relative to what I am getting?" The first question is unanswerable. No one knows what the future holds. The market is moved by news, by sentiment, by flows of money from foreign investors, by events no one can predict. To bet on price movements is to bet on the unknowable.

The second set of questions can be answered. The company's earnings are published. Its assets are listed. Its debts are disclosed. You can sit down with a calculator and determine within reasonable bounds, what a share of that business is worth. You can then compare that value to the market price and make an informed decision. This discipline is the essence of Graham's approach. Do not try to predict the market. Do not try to time your entry and exit. Instead, understand what you are buying, calculate what it is worth, and only buy when price reflects this worth. The market will eventually recognize the value; your job is simply to find it before the price reflects it.

The NSE is filled with companies whose stock prices bear little relation to their underlying worth. Some companies trade far above what their assets and earnings justify. Others trade far below. This gap is your opportunity. In the next article, we will turn to the two numbers that anchor every valuation: earnings per share and book value per share. You will learn where to find them, how to interpret them, and why they matter more than anything else on a stock quote.

This is the second article in a series on value investing for the Nairobi Securities Exchange. The next article will introduce earnings per share and book value per share — the two numbers that matter most.

Footnotes

Disclaimer: This article is for educational purposes only and does not constitute financial advice. Investing in securities involves risk, including the possible loss of principal. Past performance does not guarantee future results. Readers should conduct their own research and consult with a qualified financial advisor before making investment decisions.