The Importance of Financial Ratios in Predicting Stock Price Trends: A Case Study in Emerging Markets
The Importance of Financial Ratios in Predicting Stock Price Trends: A Case Study in Emerging Markets

Summary/Abstract: The purpose of this article is to investigate the importance of financial ratios derived from financial 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 STEPWISE 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.

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