FRFU-79-13.pdf - Finanse Rynki Finansowe Ubezpieczenia nr...

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The Importance of Financial Ratios in Predicting Stock Price Trends: A Case Study in Emerging Markets Thomas Arkan * Abstract: The purpose of this article is to investigate the importance of financial ratios derived from finan- cial statements to predict stock price trends in emerging markets. A statistical examination to the prediction power of 12 financial ratios was tested depending on data of 15 companies distributed on 3 sectors for the years 2005–2014 in the Kuwaiti financial market. An equation to estimate the stock price in each sector was built according to the multiple regression model after eliminating non-effective variables with the STEP- WISE method. The results showed that some ratios could give strong positive and significant relationships to stock price behaviour and trends, the most effective ratios on the stock price for the industrial sector are ROA, ROE and net profit ratio. Also the most effective ratio on the stock price for the service sector was the ROA, ROE, P/E and EPS ratio and the same for the investment sector. This study concluded that it could rely on a set of financial ratios for each sector to predict stock price, the decision maker of such investors can rely on the financial analysis presented by the financial ratios when making financial and operational decisions. Keywords: financial ratios, stock price Introduction and literature review The Primary aim of financial reporting is to provide information about the financial posi- tion and performance of companies provided by numbers disclosed in financial statements which was considered to be a guide for their decisions. The Users of accounting information in order to evaluate and forecast the profitability, equity growth, cash flow and dividends of corporates’ economic and subsequent decisions, they rely more than any other informa- tion on data arising out of financial statements or its components. Numbers in financial reporting could affect investor confidence in financial markets. Investors are looking for opportunities to invest additional resources in the most efficient capital markets and one of the main factors that every investor has in making his/her decision is to give special atten- tion to “stock price”. It is known that financial ratios are the oldest and simplest practical tools in evaluating and planning companies’ performance. They appeared in the mid nineteenth century, and * Thomas Arkan, University of Szczecin, Department of Economics, e-mail: [email protected] Finanse, Rynki Finansowe, Ubezpieczenia nr 1/2016 (79) DOI: 10.18276/frfu.2016.79-01 s. 13–26
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14 Thomas Arkan it was always used by accountants and financial analysts. Financial ratios were used by internal and external users for making their economic decisions; including investing, and performance evaluation decisions. Many financial and accounting models have been devel- oped over the past few decades. However, the financial ratios still kept their classical and
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