Fundamental Analysis of Stock Returns of Non-financial Firms Listed at the Nairobi Securities Exchange

Ogilo Fredrick,Benard Nthenge Muiva

doi:10.13189/ujaf.2015.030302

Abstract

The study sought to examine the relevance of firm fundamentals in explaining stock returns of non-financial firms listed at the Nairobi Securities Exchange. The study employed a descriptive research design. A census targeting the 44 non-financial firms listed between the years 2004 and 2013 was conducted. The study used secondary data obtained from Nairobi Securities Exchange. The relationship between stock returns and three fundamentals was measured using the Karl Pearson moment correlation coefficient while regression analysis was used to determine the effect of change in total assets, change in revenue and change in financial leverage on stock returns. The overall significance of the model was tested using F test while the significance of the individual independent variable was tested using t-test. The study found a weak positive correlation between stock returns and change in total assets, while change in revenue and change in financial leverage exhibited a negative relationship with stock returns. However, the relationship between stock returns, change in total assets, change in revenue and change in financial leverage was found not to be significant. The study concluded that change in total assets, change in revenue and change in financial leverage cannot be used to meaningfully estimate stock returns for non-financial firms listed at the Nairobi Securities Exchange. Further studies may explore the fundamental factors that significantly influences stock returns at the Nairobi Securities Exchange by further analyzing the information reported in financial statements.

Highlights

Fundamental analysis is the examination of the underlying forces that affect the well-being of the economy, industry groups and companies
This study sought to examine the relevance of a set of fundamental signals in driving stock returns of non-financial firms listed at the NSE
Stock returns exhibited a negative correlation with change in revenue and change in leverage

Summary

Introduction

Fundamental analysis is the examination of the underlying forces that affect the well-being of the economy, industry groups and companies. Fundamental analysis involves examination of financial data, management, business concept and competition. It is a method of analyzing a company’s stock prices using historical accounting and financial data. Henry, Robinson and Stowe [2] define fundamentals as characteristics of a company related to its assets, profitability, financial strength, risk or growth. They argue that market prices reflect the market assumptions and expectations on the company underlying fundamentals. Fundamentals drive cash flows and the market value securities as the present value of the future cash flows discounted at the appropriate required rate of return

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Conclusion