Title: The financial ratio usage towards predicting stock returns in Malaysia

Authors: Mohamad Jais; Shaharudin Jakpar; Tan Kia Puai Doris; Junaid M. Shaikh

Addresses: Faculty of Economics and Business, University Malaysia, Sarawak, 94300, Kota Samarahan, Sarawak, Malaysia. ' Faculty of Economics and Business, University Malaysia, Sarawak, 94300, Kota Samarahan, Sarawak, Malaysia. ' Faculty of Economics and Business, University Malaysia, Sarawak, 94300, Kota Samarahan, Sarawak, Malaysia. ' Accounting Department, School of Business, Curtin University, Sarawak Offshore Campus (Australian University), Miri, 98009, Sarawak, Malaysia

Abstract: This paper examines whether a simple fundamental analysis strategy based on historical accounting information can predict stock returns. Construction and material sector are chosen in this study. Five common stock return predictor used in this study are price earning (PE), return of equity (ROE), debt to equity (DE), earning growth (EG) and price to net tangible asset (P/NTA). The results show that historical accounting signals are able to predict stock return. The mature group firm outperformed new and stable firm in predictive power. The finding reveals that nearly all return predictor have positive correlation with future stock return. Despite the down activity of the market over the sample period chosen, results reveal that fundamental accounting signals of winner portfolio that provide positive future return from a loser one generating a negative return still be able to generate positive return.

Keywords: financial ratio; stock return prediction; stock returns; future earnings; accounting signals; portfolio; Malaysia; historical accounting information.

DOI: 10.1504/IJMFA.2012.049677

International Journal of Managerial and Financial Accounting, 2012 Vol.4 No.4, pp.377 - 401

Published online: 16 Aug 2014 *

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