Abstract
This study examines the relationship between several financial indicators (profitability& leverage measures) and stock return, to assist the management in the Jordanian manufacturing companies in decision making. The study sample consists of 65 manufacturing companies that have been listed in Amman Stock Exchange over the 10-year period (2001-2011). Five financial ratios are used to examine the relationship between profitability measures (Net Profit margin (NPM), Gross Profit Margin (GPM), Return on Assets (ROA), Return on Equity (ROE), Earnings per Share (EPS)) and stock returns.Three financial ratios are used to examine the relationship between leverage measures (Debt Ratio (DR), Debt to Equity Ratio (DER), Interest Coverage Ratio (CR)) and stock returns. Statistical analysis undertaken to examine the relationship between stock return and the financial indicators (Profitability and Leverage measures) are, correlation analysis, multiple regression and descriptive statistics. Data are obtained from the published annual reports and the monthly statistical bulletins issued by (ASE) over the study period. The results show that (GPM), (ROA), (ROE), and (EPS) have a significant relationship with stock return. And the others (NPM) and leverage measures ((DR), (DER), and (CR)) don’t have a significant relationship with stock return. This study recommends managers of manufacturing companies to focus more on financial ratios that have significant relationship with stock return for more profits and less debts, future research is also recommended to examine this relation in other sectors and to use other financial ratios.
Highlights
Financial ratios allow analysts to synthesize large amounts of financial and accounting information into metrics that can be compared and contrasted
Data Analysis Results The results of the analysis show that: -Net Profit Margin (NPM) don’t have a significant relationship with stock returns. -Debt Ratio (DR) don’t have a significant relationship with stock returns. -Debt to Equity Ratio (DER) don’t have a significant relationship with stock returns. -Interest Coverage Ratio (CR) don’t have a significant relationship with stock returns. -Gross Profit Margin (GPM) have a significant relationship with stock returns. -Return on Assets (ROA) have a significant relationship with stock returns. -Return on Equity (ROE) have a significant relationship with stock returns. -Earnings Per Share (EPS) have a significant relationship with stock returns
The results were as expected compared to what have been analyzed in previous literature, where most of the profitability ratios had a significant relationship with stock returns
Summary
Financial ratios allow analysts to synthesize large amounts of financial and accounting information into metrics that can be compared and contrasted Examination of these ratios can help to assess the financial health of a firm. This study will examine the relationship between profitability and leverage measures on one hand and the stock return on the other hand. Is there a relationship between profitability ratios and stock returns? The purpose of this study is to examine the relationship between the profitability and leverage measures on one hand and the stock return on the other hand during the period 2001-2011 for Jordanian companies in the manufacturing sector in Amman Stock Exchange. The objectives of this study can be stated as: 1.To examine the relationship between the profitability measures and stock return. The objectives of this study can be stated as: 1.To examine the relationship between the profitability measures and stock return. 2.To examine the relationship between the leverage measures and stock return. 3.To help top managers in the manufacturing companies in decision making. 4.To increase the knowledge in the literature
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