Are Financial Ratios Rational?

Abstract: Scope: This thesis investigates if it is possible to generate an abnormal return on the Swedish stock exchange in 1993 to 2007 by adopting an investment strategy that is exclusionary based on seven different financial ratios. The financial ratios analyzed are price-to-earnings, dividend yield, price-to-book, EV/EBITDA, price-to-sales, FCF/CAPEX and MV/(FCF/std). It also explores if there is a value premium by calculating the difference between the portfolios containing companies with the highest ratios to the portfolio with the lowest ratios.Findings: There are no indications that it is possible to use the financial ratios analyzed as the only criterion when selecting stocks to invest in and create abnormal return over time. Moreover our results indicate that there has been no significantly proven value premium in our data on the Swedish stock market between 1993 and 2007.