Evaluating the relationship between ratios related to trading prices and stock returns in companies listed on the stock exchange

Dissertation for Master's Degree

Tension: Public Administration

Abstract:

The purpose of this research is to find the relationship between price coefficients and stock returns in the cement industry of the stock exchange. Price coefficients are part of relative valuation methods and the most common and famous methods of stock valuation in the capital market. The basis of the price multiples method is that the value of the stock depends on the amount of profit, assets or other value that comes from owning the stock. The price coefficients used in this research are EV/EBITDA, P/CFO, P/S, P/B, P/E. In the method of coefficients, by comparing the stock price coefficient with the justified price coefficient, we make a decision regarding the cheapness or expensiveness of the stock, in such a way that if the price coefficient of a particular stock is not lower than the justified price coefficient, then that stock is cheap. The research was carried out in a seven-year period from 83 to 89. The study process is of the library type and post-event type, using the correlation test including the correlation coefficient and the use of simple and multiple panel regression analysis, the models have been estimated and the hypotheses have been tested. The results of testing the first to fifth hypotheses indicate that stock returns have no significant and inverse relationship with the EV/EBITDA, P/CFO, P/S, P/B, P/E variables, or the P/CFO variable, and regarding the sixth hypothesis, the EV/EBITDA, P/B, and P/E variables respectively have the greatest effect in determining the stock returns of the cement industry.

Key words: valuation methods, price coefficients and returns Equity rights

Chapter 1

"Generalities of research"

-1 Introduction

The world in the 21st century is full of competition, market development, the emergence and spread of superior technologies and business expansion. Therefore, the condition of success in this field is to take advantage of the opportunities and face the challenges ahead, and all of these require that the process of economic development with a strategic approach towards recognizing the new international conditions and with an attitude towards the most important issues and bottlenecks of the national economy, paves the way for structural transformations and responding to the requirements of sustainable and stable growth of the country's economy (Sehmani Asal, 2016). Production, employment and long-term establishment of trust is powerful, dynamic and growing. In this regard, one of the most important and sensitive economic centers is the securities market. Although Iran's capital market has not yet reached full maturity and is undergoing a gradual evolutionary path, over time, the attention of senior political officials and officials has been drawn to it, and the general public has become more inclined towards buying financial assets, and its importance is increasing. Various groups participate in the stock market. Among the actors of this market, we can refer to shareholders, traders, brokers, market operators, experts and financial analysts. They are continuously evaluating the value of shares, and comparing the shares of different companies, identifying cheap shares to buy and shares above the real price to sell, buying and selling shares and making investment decisions (Davani, 2017).

Investors and other participants in the securities market have diverse and numerous needs, tools, criteria and information in order to make decisions. Valuation based on price coefficients is one of the relative methods and the most common and famous methods of stock valuation in the capital market. The basis of the price coefficient method is that the value of the share depends on the amount of profit, property or other value that comes from owning shares. (Bakhshiani Warai, 2017) Familiarity and sufficient understanding of price coefficients and its scope of application can be useful and beneficial for investors in economic decisions. The difference in price coefficients in different countries, industries, sectors and companies and during different times indicates the fact that price coefficients are influenced by different factors and variables. In the research conducted in this regard, researchers have mainly tested and investigated two groups of economic and accounting variables as the influencing factors determining the P/E ratio.  The results of this research have shown that the difference and deviation in P/E ratios can explain economic variables such as inflation rate, interest rate, and income tax rate, and accounting variables such as: next year's profit per share, profit retention percentage, company risk rate and expected profit growth rate.

1-2- Defining and stating the problem

Capital investors use different models for stock valuations. The application of these models is different according to the industry and the field of activity of the companies. A group of valuation methods are known as relative methods, based on which the value of each company is determined relative to the value of other companies in the same group. Valuation based on price coefficients are one of the relative methods for valuing shares in the capital market. (Bakhshiani Warai, 2017)

Following further analysis of the problem, we will seek to explain the nature, connection and expansion of the issue to other variables and concepts related to the securities market, as well as how to use it in investment decisions in the securities market.

The ratio of the trading price of each share to the profit of each share is a function of three variables; Expected profit growth rate, dividend ratio for each share and expected return (cost of shares).

Like other companies, institutions that have a high expected profit growth rate have a low dividend ratio and a high expected shareholder rate. Therefore, the ratio of price to profitability should be higher for them. Higher growth rate variables in profitability, dividend ratio, cost of shares and return on equity determine the ratio of the trading price of each share to the book value of equity per share. For example, higher growth rates in profitability, higher dividend ratios, lower costs of equity, and higher return on equity should all be reflected in a higher price-to-book value of equity ratio. Of these four variables, return on equity

shares has the greatest effect on the ratio of the price to the book value of equity, and hence it is one of the variables that determine the above ratio. The ratio of the trading price of each share to the sales per share has an inverse relationship with the profit margin and the growth rate and the expected return (cost of shares). The ratio of the trading price of each share to the operating cash flow of each share has a direct relationship with the cash flow growth rate and an inverse relationship with the expected rate of return. (Bakhshiani Warai, 1387).

The growth rate variables in profitability, cost of capital, investment quality and tax rate determine the ratio of the organization's value to the profit before interest, tax and depreciation. For example, a higher growth rate in profitability, lower cost of capital, higher quality of investment (higher return) and lower tax rate all show themselves in the ratio of the value of the organization to the profit before interest, tax and depreciation, also the use of these coefficients based on the basics in an industry are the most effective.

According to what was stated in this research, we are investigating this issue:

- Are the coefficients between Is there a relationship between P/E, P/B, P/S, P/CFO and EV/EBITDA with stock returns in the industry?

- What is the difference between the effective coefficients in the stock returns of the industry?

1-3 The importance and necessity of research

The goal of investors from investing in company stocks is to obtain higher stock returns, and since price coefficients are one of the stock valuation models in the capital market, the importance of this research topic is examined from the following perspectives.

The spatial dimension:

Because the research was conducted among accepted companies (cement industry) and the importance of the stock market as a basic tool for advanced economies and a place to equip and optimally allocate small capitals to profitable, useful, potential activities, as well as a safe place for investment that is willing to participate in this market with any degree of risk taking is clear and on the other hand, the rules and regulations for the acceptance of companies and economic units and their control by The control mechanisms and inspection and technical boards have created an atmosphere in this market where companies that enter the stock market in any industry are prominent companies that meet the acceptance requirements and minimum legal, financial and operational standards, and this can be an indicator of the top companies in any field of activity, so it is significant to examine the importance of this issue from this point of view.

When a person decides to invest in shares, the first issue he faces is the selection of the desired share.

In the securities market, especially investors, most of them make decisions based on unofficial and incorrect information, which leads to their losses and eventually discouragement and withdrawal from the capital market.