Financial Ratios and Portfolio Construction
DOI:
https://doi.org/10.33736/uraf.8546.2024Keywords:
Fundamental Analysis; Efficient Portfolio; Current Ratio; Return on Equity; Debt-to-Equity Ratio; Modern Portfolio TheoryAbstract
This paper aims to provide empirical evidence of portfolio construction using the current, return on equity, and debt-to-equity ratio across the top three industries in Malaysia. This study analysed 30 companies listed on Bursa Malaysia from three different industries: the energy industry, the plantation industry, and the consumer products and services industry. We find that all 17 portfolios generate positive returns except Portfolio 12. There is no statistically significant difference between the mean of the portfolio with the highest ratios and the mean of the portfolio with the lowest ratios for the three financial ratios. The results of the study provide valuable insight for portfolio managers and investors.
References
Adawiyah, N. R., & Setiyawati, H. (2019). The effect of current ratio, return on equity, and firm size on stock return (study of manufacturing sector food and beverage in Indonesia Stock Exchange). Scholars Bulletin, 5(09), 513-520. http://10.21276/sb.2019.5.9.4
Ahuja, A. (2015). Portfolio diversification in the Karachi stock exchange. Pakistan Journal of Engineering, Technology & Science, 1(1). http://dx.doi.org/10.22555/pjets.v1i1.139
Balcilar, M., Cerci, G., & Demirer, R. (2016). Is there a role for Islamic bonds in global
diversification strategies? Managerial Finance, 42(7), 656-679.
https://doi.org/10.1108/MF-07-2015-0189
Banerjee, A. (2019). Predicting stock return of UAE listed companies using financial ratios.
Accounting and Finance Research, 8(2), 214-225. https://doi.org/10.5430/afr.v8n2p214
Barber, B.M. & Lyon, J.D. (1997). Detecting long-run abnormal stock returns: The
empirical power and specification of test statistics to prove hypothesis. Journal of
Financial Economics, 43(3), 341-372. https://doi.org/10.1016/S0304-405X(96)00890-2
Battaglia, T. K., & Leal, R. P. (2017). Equally weighted portfolios of randomly selected stocks and the individual investor. Latin American Business Review, 18(1), 69-90. https://doi.org/10.1080/10978526.2016.1251824
Berk, C., & Tutarli, B. (2021). Dead or alive: Modern portfolio theory based on financial
analysis. Universal Journal of Accounting and Finance, 8(4), 83–91. https://doi.org/10.13189/UJAF.2020.080401
Calvello, M. (2019, November 13). What is a current ratio? (+ The current ratio formula). G2. Retrieved from: https://www.g2.com/articles/current-ratio
Daniel, H. (2015). The effect of internal factors on stock price of the company LQ 45 listed
on the Indonesian Stock Exchange (IDX). EMBA Journals, 3(3), 863-876.
Dewi, P. D. A., & Suaryana, I. G. N. A. (2013). Effect of EPS, DER, and PBV on stock
prices. Udayana University Accounting E-Journal, 4(1), 215-229.
Dita, A. H., & Murtaqi, I. (2014). The effect of net profit margin, price to book value and
debt to equity ratio to stock return in the Indonesian consumer goods industry.
Journal of Business and Management, 3(3), 305-315.
Eljelly, A. M. A. (2004). Liquidity ‐ profitability trade-off: An empirical investigation in an
emerging market. International Journal of Commerce and Management, 14(2), 48– 61. https://doi.org/10.1108/10569210480000179
Elton, E. J., & Gruber, M. J. (1997). Modern portfolio theory, 1950 to date. Journal of
Banking & Finance, 21(11-12), 1743-1759.
Esajian, P. (2022). What is a good debt to equity ratio? Fortune Builder. Retrieved from:
https://www.fortunebuilders.com/what-is-a-good-debt-to-equity-ratio/
Fabozzi, F. J., & Peterson, P. P. (2003). Financial Management and Analysis (Vol. 132). John Wiley & Sons.
Gunnars, K. (2022). Return on equity (ROE). Stock Analysis. Retrieved from:
https://stockanalysis.com/term/roe-return-on-equity/
Har, W. P., & Ghafar, M. A. A. (2015). The impact of accounting earnings on stock returns:
The case of Malaysia's plantation industry. International Journal of Business and Management, 10(4), 155. http://dx.doi.org/10.5539/ijbm.v10n4p155
Heikal, M., Khaddafi, M., & Ummah, A. (2014). Influence analysis of return on assets (ROA), return on equity (ROE), net profit margin (NPM), debt to equity ratio (DER), and current ratio (CR), against corporate profit growth in automotive in Indonesia Stock Exchange. International Journal of Academic Research in Business and Social Sciences, 4(12), 101. http://dx.doi.org/10.6007/IJARBSS/v4-i12/1331
Herawati, A., & Putra, A. S. (2018). The influence of fundamental analysis on stock prices:
The case of food and beverage industries. European Research Studies, 21(3), 316-
https://doi:10.35808/ersj/1063
Ho, S. (2023, January 6). Top and worst performing Malaysian Sectors in 2022. MyPF. Retrieved from :https://mypf.my/2023/01/06/top-and-worst-performing-malaysian- sectors-in-2022/#:~:text=Utilities- ,Top%20Performing%20%231%3A%20Energy,natural%20gas%20prices%20were% 20high.
Husna, A., & Satria, I. (2019). Effects of return on asset, debt to asset ratio, current ratio, firm size, and dividend payout ratio on firm value. International Journal of Economics and Financial Issues, 9(5), 50-54. https://doi.org/10.32479/ijefi.8595
Irman, M., & Purwati, A. A. (2020). Analysis on the influence of current ratio, debt to equity
ratio and total asset turnover toward return on assets on the automotive and component company that has been registered in Indonesia Stock Exchange Within 2011-2017. International Journal of Economics Development Research (IJEDR), 1(1), 36-44. https://doi.org/10.37385/ijedr.v1i1.26
Jais, M., Jakpar, S., Doris, T. K. P., & Shaikh, J. M. (2012). The financial ratio usage towards predicting stock returns in Malaysia. International Journal of Managerial and Financial Accounting, 4(4), 377-401. https://doi.org/10.1504/IJMFA.2012.049677 Juwita, C. P., & Diana, N. (2020). The effect of debt-to-equity ratio and return on equity on stock price in Jakarta Islamic Index Companies on Indonesia Stock Exchange period 2015-2019. Management Analysis Journal, 9(4), 434-
https://doi.org/10.15294/MAJ.V9I4.41890
Kamar, K. (2017). Analysis of the effect of return on equity (ROE) and debt to equity ratio
(DER) on stock price on cement industry listed in Indonesia stock exchange (IDX) in the year of 2011-2015. IOSR Journal of Business and Management, 19(05), 66-76. https://doi.org/10.9790/487X-1905036676
Krishnamoorthy, D. N., & Mahabub Basha, S. (2022). An empirical study on construction
portfolio with reference to BSE. International Journal of Financial Management and Economics, 5(1), 110-114. https://doi.org/10.33545/26179210.2022.v5.i1.130
Kusmayadi, D., Rahman, R., & Abdullah, Y. (2018). Analysis of the effect of net profit
margin, price to book value, and debt to equity ratio on stock return. International Journal of Recent Scientific Research, 9(7), 28091-28095.
http://dx.doi.org/10.24327/ijrsr.2018.0907.2392
Lee, H. S., Cheng, F. F., & Chong, S. C. (2016). Markowitz portfolio theory and capital asset pricing model for Kuala Lumpur stock exchange: A case revisited. International Journal of Economics and Financial Issues, 6(3), 59-65.
https://dergipark.org.tr/en/pub/ijefi/issue/31983/352657
Lim, T., & Ong, C. S. (2021). Portfolio diversification using Shape-Based Clustering.
Journal of Financial Data Science, 3(1), 111–126.
https://doi.org/10.3905/jfds.2020.1.054
Manalu, Y., Fauziah, S., Hardianti, R., & Purnomo, A. (2020). The influence of financial
ratios towards profit growth (An empirical study on mining companies in
Indonesia Stock Exchange 2016-2019). PalArch's Journal of Archaeology of
Egypt/Egyptology, 17(5), 941-
https://archives.palarch.nl/index.php/jae/article/view/3870/3828
Marito, B. C., & Sjarif, A. D. (2020). The impact of current ratio, debt to equity ratio, return
on assets, dividend yield, and market capitalization on stock return (Evidence from listed manufacturing companies in Indonesia stock exchange). Economics, 7(1), 10- 16. DOI: 10.27512/sjppi-ukm/ses/a11052020
Mittal, S., Bhattacharya, S., & Mandal, S. (2022). Characteristics analysis of behavioural
portfolio theory in the Markowitz portfolio theory framework. Managerial finance, 48(2), 277-288. https://doi.org/10.1108/MF-05-2021-0208
Mudzakar, M. K., & Wardanny, I. P. (2021). The effect of return on asset, return on equity, earning per share, and price earnings ratio toward stock return (Empirical study of transportation). Turkish Journal of Computer and Mathematics Education (TURCOMAT), 12(8), 387-392. https://doi.org/10.17762/turcomat.v12i8.2812
Mukherji, S., Dhatt, M. S., & Kim, Y. H. (1997). A fundamental analysis of Korean stock
returns. Financial Analysts Journal, 53(3), 75-80.
https://doi.org/10.2469/faj.v53.n3.2086
Nanda, S. R., Mahanty, B., & Tiwari, M. K. (2010). Clustering Indian stock market data for
portfolio management. Expert Systems with Applications, 37(12), 8793-8798.
https://doi.org/10.1016/j.eswa.2010.06.026
Naveen, C. H. (2014). Application of Sharpe single index model to BSE. Management Today, 4(2), 1-5. http://dx.doi.org/10.11127/gmt.2014.06.01
Nick, T. G. (2007). Descriptive statistics. Topics in biostatistics, 33-52.
Öztürk, H., & Karabulut, T. A. (2018). The relationship between earnings-to-price, current
ratio, profit margin and return: An empirical analysis on Istanbul stock exchange. A
accounting and Finance Research, 7(1), 109-115.
https://doi.org/10.5430/afr.v7n1p109
Pandansari, F.A. (2012). Analysis of fundamental factors against stock price. Accounting Analysis Journal, 1(1), 27-34.
Petcharabul, P., & Romprasert, S. (2014). Technology industry on financial ratios and stock
returns. Journal of Business and Economics, 5(5), 739-746.
https://doi.org/:10.15341/jbe(2155-7950)/05.05.2014/012
Poornima, S., & Remesh, A. P. (2019). Optimal portfolio construction of selected stocks
from NSEnusing sharpe's single index model. International Journal of Management, IT and Engineering, 7(12), 283-298.
Rochim, R., & Ghoniyah, N. (2017). Analysis on the effect of current ratio, cashflow from operation to debt, firm size and return on equity on stock return. IJIBE (International Journal of Islamic Business Ethics), 2(3), 41-51. http://dx.doi.org/10.30659/ijibe.2.3.41-51
Ross, S. A., Westerfield, R. W., & Jaffe, J. F. (1996). Corporate Finance: Irwin. Homewood,
IL, 60430
Rout, B., & Panda, J. (2020). Construction of optimal portfolio on selected stocks of BSE
using Sharpe’s Single Index Model. Srusti Management Review, 12(1), 27-41.
Saito-Chung, D. (October 20, 2022). Why the EPS rating is one key to picking the best
stocks. Investor’s Business Daily. Retrieved from: https://www.investors.com/how-to- invest/investors-corner/eps-rating-is-key-to-picking-great-stocks/
Saputra, F. (2022). Analysis effect return on assets (ROA), return on equity (ROE) and price earnings ratio (PER) on stock prices of Coal Companies in the Indonesia Stock Exchange (IDX) period 2018-2021. Dinasti International Journal of Economics, Finance & Accounting, 3(1), 82-94. https://doi.org/10.38035/dijefa.v3i1.1238
Sami, H. M. (2021). Portfolio construction using financial ratio indicators and classification
through machine learning. Int. J. Manag. Account, 3(4), 83-90.
https://doi.org/10.34104/ijma.021.083090
Snedecor, George W. and Cochran, William G. (1989), Statistical Methods, Eighth Edition, Iowa State University Press.
Suryana, N., & Anggadini, S. D. (2020). Analysis of stock prices affected by current ratio.
International Journal of Science, Technology & Management, 1(3), 190-197. https://doi.org/10.46729/ijstm.v1i3.44
Talamati, M. R., & Pangemanan, S. S. (2015). The effect of earnings per share (EPS) & return on equity (ROE) on stock price of banking company listed in Indonesia stock exchange (idx) 2010-2014. Jurnal EMBA: Jurnal Riset Ekonomi, Manajemen, Bisnis dan Akuntansi, 3(2). https://doi.org/10.35794/emba.3.2.2015.9287
Taljaard, B. H., & Maré, E. (2021). If the equal weighted portfolio is so great, why isn’t it working in South Africa? Investment Analysts Journal, 50(1), 32-49. https://doi.org/10.1080/10293523.2020.1870863
Thalassinos, I.E., Hanias, P.M. & Curtis, G.P. (2012). Time series prediction with neural
networks for the Athens Stock Exchange indicator. European Research Studies
Journal, 15(2), 23-31.
Thalassinos, I. E., Hanias, P. M., Curtis, G. P., & Thalassinos, E. J. (2013). Forecasting
financial indices: The Baltic Dry Indices. Marine Navigation and Safety of Sea Transportation: STCW, Maritime Education and Training (MET). Human Resources and Crew Manning, Maritime Policy, Logistics and Economic Matters, 283-290.
Thunstronm, T. (December 6, 2021). Current ratio: Definition, formula and free calculator. Fit Small Business. Retrieved from: https://fitsmallbusiness.com/what-is-current- ratio-formula/
Urbán, A., & Ormos, M. (2012). Performance analysis of equally weighted portfolios: USA and Hungary. Acta Polytechnica Hungarica, 9(2), 155-168. https://doi.org/10.1111/eufm.12042
Witkowska, D., Kompa, K., & Staszak, M. (2021). Indicators for the efficient portfolio
construction. The case of Poland. Procedia Computer Science, 192, 2022–2031. https://doi.org/10.1016/j.procs.2021.08.208
Zulkarnain, I., & Sulistiyowati, N. (2022). The effect of return on equity and debt to equity
ratio on stock prices in the company transportation sub sector listed on the Indonesia
stock exchange for the 2015-2019 period. International Journal of Social Science, 1(6), 955-966. https://doi.org/10.53625/ijss.v1i6.1666
Downloads
Published
Versions
- 2024-12-26 (2)
- 2024-12-26 (1)
How to Cite
Issue
Section
License
Copyright (c) 2024 UNIMAS Review of Accounting and Finance
This work is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License.
Copyright Transfer Statement for Journal
1) In signing this statement, the author(s) grant UNIMAS Publisher an exclusive license to publish their original research papers. The author(s) also grant UNIMAS Publisher permission to reproduce, recreate, translate, extract or summarize, and to distribute and display in any forms, formats, and media. The author(s) can reuse their papers in their future printed work without first requiring permission from UNIMAS Publisher, provided that the author(s) acknowledge and reference publication in the Journal.
2) For open access articles, the author(s) agree that their articles published under UNIMAS Publisher are distributed under the terms of the CC-BY-NC-SA (Creative Commons Attribution-Non Commercial-Share Alike 4.0 International License) which permits unrestricted use, distribution, and reproduction in any medium, for non-commercial purposes, provided the original work of the author(s) is properly cited.
3) For subscription articles, the author(s) agree that UNIMAS Publisher holds copyright, or an exclusive license to publish. Readers or users may view, download, print, and copy the content, for academic purposes, subject to the following conditions of use: (a) any reuse of materials is subject to permission from UNIMAS Publisher; (b) archived materials may only be used for academic research; (c) archived materials may not be used for commercial purposes, which include but not limited to monetary compensation by means of sale, resale, license, transfer of copyright, loan, etc.; and (d) archived materials may not be re-published in any part, either in print or online.
4) The author(s) is/are responsible to ensure his or her or their submitted work is original and does not infringe any existing copyright, trademark, patent, statutory right, or propriety right of others. Corresponding author(s) has (have) obtained permission from all co-authors prior to submission to the journal. Upon submission of the manuscript, the author(s) agree that no similar work has been or will be submitted or published elsewhere in any language. If submitted manuscript includes materials from others, the authors have obtained the permission from the copyright owners.
5) In signing this statement, the author(s) declare(s) that the researches in which they have conducted are in compliance with the current laws of the respective country and UNIMAS Journal Publication Ethics Policy. Any experimentation or research involving human or the use of animal samples must obtain approval from Human or Animal Ethics Committee in their respective institutions. The author(s) agree and understand that UNIMAS Publisher is not responsible for any compensational claims or failure caused by the author(s) in fulfilling the above-mentioned requirements. The author(s) must accept the responsibility for releasing their materials upon request by Chief Editor or UNIMAS Publisher.
6) The author(s) should have participated sufficiently in the work and ensured the appropriateness of the content of the article. The author(s) should also agree that he or she has no commercial attachments (e.g. patent or license arrangement, equity interest, consultancies, etc.) that might pose any conflict of interest with the submitted manuscript. The author(s) also agree to make any relevant materials and data available upon request by the editor or UNIMAS Publisher.
