Relationship between financial ratios and share price performance of the top five sectors on the Johannesburg Stock Exchange

Abstract

Financial ratios have been commonly used to evaluate firm financial performance and assist investors with the evaluation of shares. Yan and Zheng (2017) argued that the most important financial ratios are sector specific. The purpose of this research was to determine if statistically significant relationships exist between financial ratios and the share price performance of the top five sectors on the Johannesburg Stock Exchange based on market capitalisation. The five sectors were the mining, banking, life insurance, real estate investment trusts and mobile telecommunication sectors. Multiple linear regression as statistical method was applied over a 20-year period from 1997 to 2018. Statistically significant relationships were found between financial ratios and the share price performance for each of the five sectors. The mining sector displayed relationships with return on equity, price-to-book value, debt to equity, dividend yield, debt to assets and the total asset turnover ratios. Banking displayed relationships with the price-earnings and return on equity ratios. The life insurance sector and the operating profit margin displayed a relationship. Lastly, the mobile telecommunication sector delivered relationships with return on assets, dividend yield and debt to assets. This research delivered a practical contribution to the theory of quality fundamental analysis from a JSE sector perspective.