Predicting High-Value Stocks with Financial Ratios

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Vu, Jo (2011) Predicting High-Value Stocks with Financial Ratios. Journal of Management and World Business Research, 8 (1). pp. 12-24. ISSN 1449-3179


This study examines 150 Australian Stock Exchange (ASX) listed companies in an attempt to predict which company stocks are of greatest economic return based on their potential value to shareholders. Using the company characteristics and its twelve financial ratios, a discriminant analysis approach is used to identify which stocks are of high-value. The analysis shows that the four most significant predictor variables in discriminating between high, medium and low-value stocks are: earnings per share, return on assets, book value, and debt/equity ratios. High earnings, high return on assets, solid book value, and low debt/equity ratio are indicators of companies that are profitably run, under-priced, and well managed. Thus this finding, quantitatively derived, does make qualitative sense in the real world of finance. To the investment community, the analysis presented in this paper provides an additional tool for refining their decision in reviewing their existing portfolio, or in selecting new stocks.

Item type Article
Subjects Historical > Faculty/School/Research Centre/Department > School of Economics and Finance
Historical > FOR Classification > 1502 Banking, Finance and Investment
Historical > SEO Classification > 9001 Financial Services
Keywords ResPubID24003, Australian Stock Exchange, ASX, shareholders, stock market, market downturn, stock investments, high-value, medium-value, low-value
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