EBP-ratio as a return predictor on the Finnish Stock Market 2000–2005

Abstract

The purpose of the study is to investigate whether it is possible to form portfolios based on the rather rare valuing ratio Earn Back Period. The study period was from 2000–2005. The study was performed by forming three portfolios based on the EBP value and then comparing these portfolios against the weight restricted portfolio index. Portfolios calculated where Low-, High-, and Growth-portfolio. Growth-portfolio was formed based on the predicted future growth rate of the company. Each portfolio was re-adjusted yearly. Stocks included in the study where those listed in the Helsinki Stock Exchange.

Two hypotheses were formed to test the earning capabilities of the portfolios. First one stated that the return of the portfolios is greater than that of the market index. Second hypothesis stated that the low-EBP-portfolio will earn superior return when compared to market return. Second hypothesis was based on the previous study by Luoma & Ruuhela (2001).

Empirical study found that the High-portfolio earned higher return that the market and also outperformed other portfolios. Its risk level was also lower and the statistical testing proved the findings during the period of 2002–2005. This was contrary to previous study and very interesting finding. As the EBP-ratio is so rarely studied more studies will need to be performed to confirm its predictive power.