Efficiency of Financial Ratios in Predicting Stock Price Trends of Listed Banks at Nairobi Securities Exchange

Abstract

In this paper, we examined financial ratios and their effects in predicting stock price trends of listed banks at Nairobi Securities Exchange for the period 2019. Valuation and Profitability ratios are used to measure the value of firms and to investigate whether financial ratios have an effect on Stock Prices of the firms or not. This is investigated using multiple linear regression analysis step-wise method with P/E ratio, P/CF ratio, P/S ratio, P/B ratio, Return on Equity and Dividend Yield as the independent variables and stock prices of the firms as the dependent variables. The results of this study show that all the six financial ratios have a significant effect on stock prices. Besides, price-to-earning ratio, price-to-cash flow ratio, price-to-book ratio and return on equity have a higher correlation with stock price of the firms than other ratios. On the basis of these findings, the study concludes that I & M Holdings limited qualifies to perform better as an undervalue company in the year 2019 and companies need to pay more attention on financial ratios, and that there is increasing need for a more credible and comprehensive disclosure of financial ratios in the annual reports of firms.