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.