Abstract
Earnings of investors are maximised through analysing the financial statements of a company by conducting a financial ratio analysis. This study aims to ascertain the relationship between selected financial ratios and share prices in the South African banking sector. The primary focus is on understanding the impact of financial ratios on share prices using Multiple Linear Regression modelling and a panel data set from 2005 to 2020. The study also focuses on the five top South African banks according to market capitalisation. Data of the five South African banks was sourced from Equity RT and company annual integrated reports. Various tests were performed to test the relationships between variables and the accuracy of the regression models.
Independent variables used are Net Profit Margin, Gross Profit Margin, Operating Profit Margin, Return on Assets, Return on Equity, Net Interest Margin, Cash flow Margin, Earnings Before Interest Taxes Depreciation and Amortisation (EBITDA) Margin, Earnings per Share and Return on Invested Capital. Multiple Linear Regression models are used to evaluate the relationships between the share price of the individual five top banks in South Africa and the selected ten independent variables. Different financial ratios display a significant relationship with individual bank share price.
A Pooled Panel Regression Analysis was used in this study, where the share price of each individual bank is the dependent variable. A Hausman test was undertaken to test the better model between the Fixed Effects model and the Random Effects model, and the latter was preferred. Panel regression results from various literature indicate that there is a significant and positive linear relationship between share price and both the Net Profit Margin, Earnings Per Share and Return on Equity. However, in this research, Return on Asset and EBITDA Margin indicate a significant relationship with the share price of the five top South African banks. Cross-sectional effects are redundant, and therefore, period effects were considered.
Key words
Financial ratios, share prices, panel regression analysis, multiple linear regression analysis, South African banks, significant, relationship, correlation, positive and negative.