Stock returns as a function of financial and economic ratios

In stock analyses, the basic data used by investors when investing in securities include return as well as economic and financial ratios describing economic and financial performance of a given company. The latter ratios become more relevant in long-term investments. Interesting in this context is the question of whether there are any relationships or statistical regularities describing these variables at any given moment or their changes over time.The aim of the paper is to employ simple econometric tools to verify the hypothesis regarding the relationship between returns and selected economic and financial ratios. For the purpose of the study, five groups of ratios were used: liquidity, profitability, debt, activity (efficiency) and market ratios. Moreover, it was verified whether a relationship existed between returns and a composite measure – taxonomic measure of investment attractiveness (TMAI) – comprising all these ratios. This approach will enable the authors to verify the validity of using ratio analysis by an investor willing to acquire shares, to suggest preferences as to the period of ratio analysis and to find out whether the TMAImeasure should be considered a good criterion for decision making when acquiring securities. The study focuses on the companies listed on the Warsaw Stock Exchange in the years between 2006 and 2015. This period allows investigation of the tendencies in the analysed relationships during both an economic boom and crisis. Quarterly and yearly data was used for the purpose of the study. Such an approach yielded 10 and 40 observations for each variable for the yearly and quarterly models, respectively. The constructed econometric model of returns will be subject to statistical verification, which will enable its complete assessment. In practice, such a model can be used to predicting long-term returns on securities, which should yield good results for companies in good economic and financial condition.