THE PREDICTIVE ABILITY OF FINANCIAL RATIOS ON STOCK RETURNS. A study of the S&P Global 100 during 2000 – 2020

Abstract

This study examines the predictive ability of ten financial ratios on annual stock returns at a one-year horizon. Ratios and stock returns are observed for the S&P Global 100 Index over the time period 2000 to 2020. The index is chosen for its representativeness stemming from the size and multinationality of its constituents. Regression analysis is used to find the predictiveness of the ratios. The study shows that dividends, dividend yield, market capitalization, total revenues, earnings per share and free cash flow margin are significant predictors of annual stock return at a five percent significance level. Investors and managers are, therefore, recommended to focus on these factors. Further studies of how the factors interplay along with studies of other correlation types, are also proposed.