The link between key financial ratios and share prices of Maltese listed companies : an analysis

Abstract

PURPOSE: The aim of the study is to analyse whether movements in the share price of Maltese listed companies are reflective of its financial performance, evaluated through a number of selected accounting ratios calculated from the respective annual reports. DESIGN: The study's objective was achieved by computing the correlation coefficients between average annual share prices of all applicable Maltese listed companies and a selection of nine accounting ratios. The correlation coefficients helped in determining the nature and strength of the relationship that exists between these variables. Furthermore, comments on the related topics were gathered from a number of local stockbrokers and investment advisors during the primary data collection phase. FINDINGS: All nine accounting ratios were determined to have elements of both positive and negative correlations with annual average share prices of different listed entities. However, it was noted that ratios indicating aspects of profitability tend to be positively correlated, whereas those of liquidity or solvency tend to be negatively correlated. It was determined that although five out of the nine accounting ratios have an average negative correlation coefficient, the four positively correlated coefficients of the rest of the ratios outweigh such negative correlation, with the dividend payout being the most positively correlated accounting ratio. This was in line with the stockbrokers' expectations due to the common preferences of most local investors. CONCLUSIONS: Such findings imply that within the Maltese stock market, given its unique characteristics and inherent limitations, prices of traded equities, held to be an indicator of the current market sentiments based on future expectations, still tend to marginally reflect the financial performance of the listed entities to which they relate. VALUE: This study concludes that, given no major unexpected events take place that would abruptly and substantially influence stock markets, over a considerable period of time, share prices tend to be reflective of company performance.