Company Key Ratios as Explanators of Returns in NASDAQ OMX Helsinki

Abstract

As investors have will to attain profits as big as possible there have been generated numerous strategies. Value investing is one of the most famous and widely known investment strategies. The strategy incorporates investing in stocks that are favorably priced in respect to their fundamental value.

The purpose of this study is to investigate how the value investing strategy has performed and can the commonly applied key ratios, price-to-earnings and price-to-book, as a criterion to derive stocks into value portfolios explain the returns in Finnish stock exchange NASDAQ OMX Helsinki during the time period from 2011 until 2019. In addition to pure numerical approach to value investing, behavioural finance viewpoint is taken to consideration as it is pointed out by previous studies that it plays a key role when choices about investing are made.

The companies included in this study were first divided into three categories. 25% of stocks with the lowest (highest) key ratios were bought to value (growth) portfolio and the remaining 50% is left out as they can be viewed neutral stocks. The descriptive analysis shows that value portfolios compiled using P/E ratio has outperformed comparably formed growth portfolio. For the P/B ratio results are opposite. Statistical analysis of explanatory power of these key ratios in relation to returns is examined using OLS regression and the results show that for stock returns in NASDAQ OMX Helsinki their explanatory power is weak.