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A study of fundamental analysic (financial ratios) effect to stock price in reality and resons the stock price doesn''t reflect finacial statements

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Tiêu đề A Study of Fundamental Analysis (Financial Ratios) Effect to Stock Price in Reality and Reasons the Stock Price Doesn't Reflect Financial Statements
Tác giả Do Quoc Binh
Người hướng dẫn Dr. Smith, Mrs. Trinh
Trường học Bolton Business School, The University of Bolton
Chuyên ngành Business Management
Thể loại Bsc (Hons) Dissertation
Năm xuất bản 2023
Thành phố Bolton
Định dạng
Số trang 37
Dung lượng 1,02 MB

Cấu trúc

  • I. Introduction (7)
    • 1. Background (7)
    • 2. Rationale (8)
    • 3. Objectives (8)
    • 4. Limitations (9)
  • II. Literture review (10)
    • 1. The stock market (10)
    • 2. Fundamental analysis (10)
    • 3. Financial statement assessment (12)
    • 4. Financial ratios group (13)
  • III. Research Methology (17)
    • 1. Introduction (17)
    • 2. Research Philosophy (17)
    • 3. Research Approach (18)
    • 4. Research strategies (19)
    • 5. Choices (19)
    • 6. Time Horizons (20)
    • 7. Techniques and procedures (20)
    • 8. Triangulation in Research (21)
  • IV. Empirical results (23)
    • 1. Financial ratios signals and price movement (23)
    • 2. The reason why do stock prices not reflect fundamental analysis and investment strategies (26)
  • V. Conclusion (30)
    • 2. Summary of the empirical of research (30)
  • VI. Recommendations (32)
  • VII. References (33)

Nội dung

Introduction

Background

An important factor in a nation's economic progress is the stock market Levine and Zervos (1998) and Bekaert, Harvey, and Lundblad (2005) are two studies that find evidence of a favorable correlation between stock market trends and general indicators of economic growth The stock market acts as a middleman, bridging the gap between savings and investors They lower the cost of capital for investors and encourage economic growth by offering a countries economy with an institutional framework for attracting capital from both domestic and international sources and effectively converting it into profitable enterprises The stock market also offers market liquidity, enabling investors to trade financial assets in a less risky way and giving firms rapid access to capital (Oliveira, et al, 2006) Furthermore, robust stock markets encourage the transfer of risk from safer low-yield capital to riskier high-return capital, which encourages global risk sharing The evolution of the stock market can improve corporate governance by addressing the main problem The stock market generally aligns the interests of owners and managers, motivating managers to try to increase the value of their enterprises Investors will therefore find this market to be quite appealing and a wonderful place to generate gains

Since the beginning of 2000, the Vietnamese stock market has developed thanks to the development of two stock exchanges, the first in Ho Chi Minh City and the second in Hanoi Regarding the increase in number of publicly traded firms, as well as the improvement in market capitalization and liquidity, it has experienced rapid growth over the past ten years, almost 800 companies are currently listed listed on two exchanges (Su, et al, 2017) Therefore, it can be seen that Vietnam is a potential country with many new opportunities and the financial rewards that it brings to investors, this is considered a lucrative investment opportunity A number of foreign enterprises are investing in the Vietnamese market due to the country's rapid economic growth Many investment funds, such as the financial company Mirea Asset, have begun to pay attention to and participate in emerging markets when they see many investment prospects in Vietnam Park Heyon Joo founded the financial services company Mirea Asset in Korea in 1997

It is one of the largest independent financial services providers in Asia and a globally renowned investor in various financial institutions emerging economies, this financial partnership is very popular More than 10 countries, including the UK, USA, Vietnam and others, have a Mirea Asset presence (Mirea Asset, profile).

Rationale

There are various investment strategies that can be used to benefit the world of investments, but only fundamental analysis is examined in this research By examining the information that is currently accessible and placing a particular focus on accounting information, fundamental analysis of stocks establishes the 'fundamental' value of a stock Numerous empirical studies have forecasted future earnings using information from financial statements as a gauge of a company's potential performance The market assessment of this prospective future revenue is then evaluated The analyst selects equities that are overvalued or undervalued in relation to the current pricing The undervalued ones are investment candidates and should produce

"abnormal" returns The majority of this research process the data from financial statements using econometric approaches (Cristina, et al, 2004) The fundamental analysis predicts a stock's market value by analyzing data from financial statements (the financial "fundamentals") and predicting its price For companies that are well managed and meet certain requirements, they will be listed on the stock exchange, which helps investors to have a reliable market But most businesses won't achieve these idealized conditions (Cristina, et al, 2004) Since this study relies on financial ratios that are calculated and collected on financial statements, it is important to understand a company's financial statements There are basically 4 types of financial statements which involve income statements, balance sheets, cash-flow statements, and statements of shareholder’s equity Each type of financial statement will provide different information and investors will rely on that information to calculate ratios and will be able to disclose a number of financial signals to predict the return of the company’s stocks in the future (Mohanram, el at, 2018) However, there are no foolproof method, in some cases, even though fundamental analysis has been applied, it is still not possible to get the expected profit.

Objectives

The purpose of this study is to review fundamental analysis that will help investors find some signs and good investment opportunities through financial ratios Fundamental analysis is a fundamental method that almost anyone can use when investing However, some companies have good financial ratios, but the company's stock price hardly increases without change or even decreases To understand this phenomenon, the study will show how to test the effectiveness of the fundamental analysis method in practice by studying financial statements and company stock price charts In addition, the study explains some reasons why some companies have good fundamentals but stock prices don't increase and some solutions to use fundamental analysis more effectively.

Limitations

Investors will examine all three categories in fundamental analysis: macroeconomics, microeconomics, and companies Fundamental analysis is therefore a very thorough method, requiring extensive expertise in accounting, finance and economics For example, fundamental analysis requires an awareness of macroeconomic issues, proficiency in valuation procedures, and the ability to interpret financial accounts However, this study looks at the company's stock price movement based on financial indicators

If the company has a good fundamental (financial ratios), the company’s stock price will always increase?

What's the reason the company has good fundamentals but the price doesn't go up?

How to increase efficiency in investment?

Review fundamental analysis base on financial statements

Test the effective of fundamental analysis through the investment ratios group in reality

Giving some strategies to improve more investment performance.

Literture review

The stock market

The concept of a stock market is a place where shares of qualified companies are publicly traded In stock trading activities on the regular market and on the decentralized markets, investors are required to follow a predetermined set of laws Compliance with the rules for trading stocks or other qualified financial products creates a safe and strictly regulated environment that will provide market participants with protection from regulatory requirements The stock market plays a very important role in the economy, including the primary market and the secondary market operating under the regulations of the regulatory authorities The stock market is also a place that allows businesses to issue or sell shares for the first time to the public (initial public offering) This supports businesses attract abundant capital from many investors on the stock market A business that divides itself into various shares and offers some of those shares to the public at a fixed price per share after being listed on the stock exchange, which speeds up the fundraising process company by selling stock that anyone can buy In addition, if in the next period the company can also issue more shares through further incentives or issue rights The company also has the right to buy back their shares or delist them in case of bankruptcy or for some special reason

There are two main things that cause volatility in the stock market: external factors (political events, economy, ) and internal factors of the business In the first research to use newspaper text, Niederhoffer (1971) investigates "world events" from 1950 to 1966, as covered by the New York Times's large headlines, and links them to changes in the U.S stock market Returns on U.S stocks are correlated with macroeconomic data and news reports of "political and world events," according to Cutler, Poterba, and Summers (1989) They come to the conclusion that information from these sources about discount rates and future cash flows cannot reliably account for more than half of the fluctuation in aggregate stock prices Besides the external factors, the internal factors of the enterprise also have a great influence on the volatility of stock prices In this study, it will help investors understand the internals of the business through fundamental analysis.

Fundamental analysis

The first paper to create a stock valuation model to supplement and extend traditional correlation studies to market-based accounting studies was in 1982 by Lev and Ohlson, according to Bauman (1996) Lev and partners have three papers discussing this issue These are actually studies on analyzing stock prices using fundamental analysis In the second paper, Lev (1989) emphasized the necessity to adjust the capital market analysis to gauge and analyze difficulties and asserted that understanding the act of analyzing financial statements "without deviating much from the set of financial ratios, which is intended for use by investors Finally, In the last article, Bernard (1994) researched and made experiments on the use of accounting information to value stock prices, which is considered the construction of research models and methods used in the sample of businesses in a particular industry Researchers would then be able to benefit from their understanding of the institutions' thorough disclosures After these three articles were widely published, many researchers based on these hypotheses began to examine the relationships and analysis of financial and non-financial data related to the company to assess the equity price of the business

Fundamental analysis is the assessment of how efficiently a company converts raw materials into profit Investors can select companies that use fundamental research to sell their products and services for a profit (Krantz, Matthew, 2016) According to San and Hancock (2012), they also investigated the link between fundamental analysis and stock price from 33 different countries between 1990 and 2000 In addition to demonstrating the significant impact of macroeconomic variables in terms of size, company, industry, and emerging country for stock earnings forecasts, It was discovered that fundamental analysis makes varied short- and long- term predictions about stock returns Along with describing stock price momentum, Nguyen

2003 demonstrated that fundamental analysis (cash flow, financing, and dividends) is beneficial in predicting future stock price

Theoretically, an analyst can assess these basic factors carefully to determine whether an asset's real price is above or below its intrinsic value Finding a security's intrinsic value is similar to attempting to anticipate its future price if real prices have a tendency to trend in that way The fundamental analysis-related forecasting approach is built around this (Fama, Eugene, 1995)

Fundamental analysis can be used to forecast upcoming extraordinary returns, according to a

1998 study by the same author Reinganum and partners (1988) investigated more than 200 companies with significant share price increases and demonstrated that extreme winners could be identified using nine combinations of fundamental and technical characteristics Mukherji, Dhatt, and Kim find that stock market fundamentals are positively correlated with the book market, selling price, and debt-to-equity ratio, negatively correlated with firm size, and not significantly correlated with the beta coefficient

The fundamental analysis is depending on the stock's earnings potential, each security has an intrinsic value (in other words of economists, the equilibrium price) at any given time The profitability potential of securities is dependent on key elements including management caliber, industry, and economic outlook, and so on ( Fama, Eugene, 1995)

Nada and Igor (2016) pointed out two main disadvantages of fundamental analysis in their paper First of all, using Fundamental analysis takes a lot of time to locate and absorb the necessary information for stock selection In addition, the assessment is based on different information and criteria that depend on each individual investor such as industry, economic or political group The second is related to the efficient market hypothesis Although the financial information of listed companies is public, there is some inside information that greatly affects the share price that is difficult for investors to access

In general, Investors utilize the fundamental analysis as a fundamental technique to forecast changes in a company's stock price using indications from the financial statements, such as profitability and efficiency of usage assets, corporate liquidity, and the listed company's debt ratio Hence making money off of unusual stock spreads No technique is faultless Although many investors utilize fundamental analysis to plan their stock market investments, investors must also take the difficulty of this strategy into account The connections between the signals and contemporaneous anomalous returns cannot be used to answer the question of how effectively analysts use information (Abarbanell, et al, 1997) A study that has been published in several articles demonstrates how domestic macroeconomic activity influences the performance of the domestic stock market There are a number of research articles that have shown that macro factors and events have affected certain industries However, there are exceptions as in the paper by Hondroyiannis and Papapetrou (2001) who showed that some industries are less affected by the general situation of the economy than others, Baresa and partners (2013) also agree with this statement To address the query, this study will conduct an experiment to calculate indexes and then compare them with changes in stock prices on the market.

Financial statement assessment

Imagine a child who knows the entire dictionary by heart but is unable to employ even one word in a sentence, the author of Fundamental analysis for dummies (2016) writes That serves as a simple analogy for the fundamental analysis knowledge of some investors Investors may also have some knowledge of the income statement and balance sheet as well as a thorough understanding of the information provided therein But applying investors' knowledge can be a little more difficult

Financial ratios are important information for investors to understand how strong a company is

In order to collect ratios, investors need to appraisal financial statement Financial analysts can understand and assess the business situation more easily when using financial ratios For example, these financial ratios can be used to assess the company's growth year over year or compared with other businesses in the same field to evaluate the company's performance At the same time, using ratios helps to understand the financial situation such as liquidity, debt situation or profitability of a business These financial ratios can also aid in benchmarking a business' risk and performance assessment (CICA, 1993) Several studies have shown that the financial ratios of companies have a relationship with the firm's performance prediction (e.g., Soliman, 2008; Nissim & Penman, 2001; Fairfield & Yohn, 2001; Joseph, 2015).

Financial ratios group

Financial ratios compare various data points from the balance sheet, income statement, and statement of cash flows These data that can be gleaned about a company by combining figures from several statements will astound investors When used in analysis, financial ratios can yield some quite insightful results

In research conducted by Khan (2012), many financial ratios have been linked to the impact of fundamentals on stock prices on the stock market In the research, it has been shown that the ratios of EPS (earning per share), ROE (Return on equity), D/E (Debt to equity) and net profit margin have a huge impact on stock returns Lev and Thiagarajan (1993) found a substantial relationship between stock returns and future earnings estimates and fundamental signals like sales growth and gross margin Also in another paper, based on financial ratios such as using price-to-earnings ratios, earnings per share (EPS), debt-to-equity (D/E), equity Earnings per share, net profit margin, and return on assets also affect the market price of the stock (Dempsey, 2010 and Hatta, 2012 The obtained results show that quite similar to those of Lev and Thiagarajan, the fundamentals are significantly positively related to stock returns, except for the debt-to-equity (D/E) ratio His research also shows a significant negative correlation between D/E, net profit margin, and stock return, but a significant positive correlation between earnings and equity, earnings per share (EPS) and price-to-earnings ratio To reinforce this point, research by Martini and partners in 2009 found that with the exception of profitability, market-based ratios, and turnover rates, all of these factors have a negative impact on stock returns when the functions of cash flow, firm size, market-base ratio, liquidity ratio and return are examined

Muhammad and partners (2018) discovered a significant correlation between financial ratios and stock returns They further confirm that Return on Equity (ROE) and Return on Assets (ROA) have a large positive effect on stock returns, while the remaining variables have a weak positive effect on the profitability of each stock (Zarezadeh, et al 2011) confirmed a favorable correlation between financial variables and stock returns using fuzzy regression analysis Hanssan and Rehman (2008) have found that in the majority of emerging markets in Asia and Malaysia, stock returns are strongly correlated with the metrics used to evaluate corporate fundamentals

Sharma and Pretti (2009) discovered that participants in securities trading make decisions based on the firm's intrinsic value, as determined by fundamental analysis However, it is highly challenging to make decisions based on growth analysis These findings supported the notion that fundamental analysis plays little role in differentiating between low and high group enterprises Emin, Yasemin, Akarim, (2012) claim that for the period of almost ten years (from

2000 to 2009), the impact of earnings per share (EPS), price-to-earnings ratio (P/E), and market-to-book ratio on stock returns of Turkish insurance companies was very noticeable When fresh information enters the market, stock prices can change, proving that the market is efficient (Fama, Fisher, Jensen, and Roll 2007)

How effectively of financial indicators were assessed and interpreted by the firm would determine how crucial financial signals are for a company to perform successfully (increase stock returns) (Richardson, 2009) A good balance of debt and equity, effective asset utilization, management of the inventory, receivables, and payables cycles, and cash conversion cycle all contribute to better market-based ratios, which in turn help an organization perform well and generate excess stock returns (Sen, 2009)

An investor purchases and holds shares of a corporation in the anticipation of receiving a dividend or capital gain (Islam et al, 2014) Typically, profit is used to determine dividend payments and potential future gains in share value (Rinaldi, 2014) EPS is a ratio that expresses the amount of net profit made for each share during a fiscal year after taxes (Rusdin, 2008) Another ratio that displays the company's profit share for each share is called EPS (Sunaryo, 2011) This ratio demonstrates the profit received by shareholders or investors per share (Hermawanti & Hidayat, 2014) The following is a formula for EPS:

To gauge market prices in relation to book value, employ market ratios (Mudawamah et al., 2018) This ratio's perspective is more heavily influenced by the viewpoint of the investor (Lukiana, 2013) P/E can be used to calculate market ratios (Robbetze et al, 2017) One indicator that is frequently used as part of a security analysis to evaluate the cost of a stock traded on the stock market is the P/E (Sugiyanto, 2008) The price-to-earnings ratio (P/E), which is also expected to rise, is used to compare the market price per share and earnings per share The P/E ratio, which calculates how much investors are willing to pay for every dollar of reported profit (Brigham, 2010) P/E also demonstrates how well issuers operate in the market; the lower the ratio, the better for earning profits (Rusdin, 2008) The formula for P/E is as follows:

Sugiono & Untung (2016) define profitability ratio as a ratio used to evaluate management performance as shown in the investment return from the company's operations, or, in other words, as a means of gauging the company's overall efficacy and efficiency in managing liabilities and capital According to Horngren & Harrison (2007), the return ratio on equity illustrates the relationship between net profit and equity of common shareholders, or how much profit is generated for each dollar that common shareholders contribute The formula for ROE is as follows:

ROA is a ratio that assesses a company's capacity to make money from its investment activity (Mardiyanto, 2009) This ratio is used to gauge management's success in generating broad benefits (Alghifari et al., 2013) The higher the ROA, the more profits the organization generates and the better off it is in terms of asset utilization (Hayati et al., 2019) Another ratio called ROA demonstrates the rate of return produced by the management of shareholder money invested after subtracting obligations to creditors (Rusdin, 2008) The formula for ROA is as follows:

If a corporation just uses capital or equity, it will be challenging to expand the business, which needs more money (Amelia et al., 2019) Debt plays a useful part in the company's ability to expand (Margaretha & Ramadhan, 2010) The risk to the business is greater if debt exceeds equity ownership (Budiyono & Santoso, 2019) To view this performance, you must meet certain requirements (Wianta Efendi & Adi Wibowo, 2017) A ratio called DER examines the ratio of debt to equity (Atidhira & Yustina, 2017) Investors will want a higher level of profit if the D/E ratio is higher since it indicates a higher level of risk (Sartono, 2008) A high percentage also indicates that fewer assets are financed with the company's own cash (Tobergte & Curtis, 2013) D/E is a ratio that is used to determine the amount of available collateral for creditors while examining financial statements (Fahmi, 2012) D/E also shows the issuer's capital structure when compared to liabilities, the higher the ratio the better (Rusdin, 2008) The formulation of D/E is as follows:

Price Book Value (PBV), which compares the stock market value and the book value of shares, can be used to determine a company's worth (Brigham, 2001) According to the goals of the company's owners, raising the value of the business is a success because doing so will also boost the owners' well-being In other words, great shareholder wealth is correlated with high business value PBV is a comparison of the share's book value and market price Hence, businesses with high PBV ratios demonstrate that the company's growth prospects are excellent as seen by the high stock market price of its book value, whereas businesses with limited growth will have low PBV ratios (Husnan,2015)

In general, the financial situation of the enterprise is always a top concern not only for managers but also for investors in corporate shares (in case the business is listed on the stock exchange) The analysis of indicators plays an extremely important role in fundamental analysis If investors have a clear grasp and accurate assessment of the current state of business operations to forecast future growth potential to make the right investment decisions and optimize profits Based on theoretical review and previous research, the following hypothesis was proposed: H1: Financial ratios play an important role to predict the stock price

H2: Macro- and micro-economic factors that affect a company's stock price

H3: Understand all three factors including macro, micro and business to improve and increase profits in investment

Research Methology

Introduction

In this section, the research methods presented and selected to clarify the research objectives will be discussed This chapter will also explain why specific strategies were selected to address the research challenge Setting goals, managing data, and communicating findings all take place in a systematic manner that follows recognized frameworks and best practices Frameworks and guidelines provide guidance to researchers on what to include in studies, how to perform them, and what inferences can be made from the data collected (Williams, Carrie, 2007) The research onion serves as an example of the numerous techniques a researcher should employ when developing a research strategy Saunders and other academics developed it in 2007 to illustrate the several phases a researcher must take in order to build a successful technique Each layer of the onion has a description of the study process The theoretical framework of this study will be established using one of the current models, the so-called

"research onion," created by Saunders, Lewis, and Thornhill (2009) for business research and extensively utilized in the social sciences community In the sections that follow, some of the techniques applied in this framework will be discussed

Figure 1: The research Onion Framework (Saunders et al, 2009)

Research Philosophy

The concept of research philosophy is associated with the assumption, knowledge, and nature of the study (Holden, et al, 2004) Based on that a method of developing knowledge is expanded Because each individual has different thoughts and beliefs about the nature of knowledge and truth, so researchers with different beliefs and knowledge want to convey their message to the reader There are various dimensions in “Onion” framework (Saunders et al, 2009) This study will use positivism, interpretivism

Positivism is defined as the fact that it does not change and that it can be objectively observed and described, which does not affect the facts under study (Levin, 1988) On the basis of previously observed and interpreted facts and their linkages, predictions can be made Positivism has a lengthy and spectacular history Because positivist theory is so ingrained in our culture, claims of knowledge that are not based on it are simply regarded as unscientific Alavi and Carlson (1992) evaluated 902 research papers on IS and discovered that all empirical investigations employed a positivist technique in an unintentional effort to support this viewpoint Although positivism aims to reduce complexity by adjusting and rationalizing the provided variables while taking into account the possibility of isolating the variable, its application can be challenging in some research situations and can be challenging and difficult However, the researcher found some positivist traits that are consistent with the topic and objectives of this investigation

Interpretivism has grown as a result of the subjective criticism of positivism (Alharahsheh et al., 2020) An interpretive theory is more concerned with complicated variables and contextual aspects because people give deeper interpretations to physical phenomena than they do to physical phenomena It assumes that people cannot be examined in the same way that physical phenomena can Interpretivism seeks to bring deep insights gained through experience, as opposed to positivism, which seeks to establish universal rules that are obviously applicable to everyone regardless of some significant conditions and aspects

Research Approach

According to Saunders and partners (2016), The three major methods for developing theories are deductive, inductive, and abductive Since most social scientist scholars concur that all types of theories involve some degree of combining various approaches, inference was used in this study Basically, deductive Research is called inference that moves from general rule to specific rule-like inference and is often used to test theories (Gregory, et al, 2011).

Research strategies

The overall research plan is defined by the research plan One of the components of research methodology, it covers the procedure utilized to conduct the study The optimal research method should take into account the study's goals and difficulties, the time and resources available, the researcher's philosophical orientation, and the breadth of the field's existing knowledge (Wedawatta, et al., 2011) In this study, both archival and action research were utilised

This field is defined as "the systematic collection and analysis of data for the purpose of taking action and creating change" by producing valuable information (Gillis & Jackson, 2002, p 264) Action research is regarded as a subset of this discipline For new researchers planning to perform action research, the terminology used in the discourse, It can be challenging to distinguish between several types of participatory inquiry, such as participatory action research, participatory research, community-based participatory research, and others

According to Gustavsson (2017), a case study is "an extensive study of a person, a group of people, or a unit in order to generalize to several units." According to Woods and Calanzaro (1980), a case study is sometimes referred to as an extensive, methodical analysis of a person, organization, community, or other entity in which the researcher looks at extensive data pertaining to a number of variables

Researchers can get knowledge via archival research, including journalists and other members of the media, academics, historians, genealogists, knowledge managers, legal experts, and others (Eilifsen et al., 2000) Because there is so much information that has been preserved, archival research can occasionally be more challenging and time-consuming than a typical web search, but it frequently produces more reliable results.

Choices

The mixed method, which uses both quantitative and qualitative techniques, is distinguished by the application of two or more research philosophies The multi-method approach is characterized by the use of various techniques (Saunders, 2009) According to Saunders (2009), the multi-method technique is often divided into sections that produce a specific dataset

According to Gillis and Jackson (2002) and Leininger (1985), qualitative research combines methodologies and strategies for observing, documenting, evaluating, and interpreting the traits, trends, quality, and importance of the events under investigation Instead of predicting and controlling, the goal of qualitative approaches is to describe and comprehend Quantitative research is the process of gathering and analyzing numerical data (Joop and Hennie, 2005) It is useful for locating trends and averages, developing hypotheses, determining causality, and extrapolating results to bigger populations.

Time Horizons

This study will employ a longitudinal methodology In a longitudinal study, the same participants were observed over time to check for any changes that might have developed In longitudinal research, several features are observed and data are gathered without trying to alter the factors (Rajulton, Fernando, 2011) This approach is appropriate for this study because it will gather information from many companies and then track changes in stock market prices.

Techniques and procedures

Data are many sorts of information that have undergone certain formatting Data collection is the process of gathering, measuring, and analyzing data to find answers to research questions, assess findings, and forecast trends, and probability from numerous reliable sources (Choy, Looi, 2014) Because it is imperative to have a plan for the management of all types of data and primary materials used in this research, the study will use both primary and secondary data Primary data are the first pieces of information you gather while doing your inquiry Secondary data can be produced using the author's primary data Frequently, the line dividing primary and secondary data may not be entirely clear (Joop and Hennie, 2005)

To collect data, researchers will use of a number of different data collection strategies There are numerous data collection techniques such as interview, observation, questionnaires and surveys, documents and records, focus group and so on In order to do complete this study, two techniques are used which are interview and case study

Interviewing is unquestionably the most regular and typical means of gathering qualitative data The interviewee takes on the role of the respondent in a traditional interview, and the researcher establishes the topic and poses the questions The three most common forms of interviews are consist of: individual in-depth interview, semi-structure interview, and unstructured interview The semi-structure interview is used in this study Interviewing is unquestionably the most regular and typical means of gathering qualitative data The interviewee takes on the role of the respondent in a traditional interview, and the researcher establishes the topic and poses the questions (DiCicco, et al, 2006) The interview took place on the zoom platform with the research staff of Mirea asset company The interviewee is a person in the Research Department of Mirea Asset company, so he has a lot of experience in the field of investment research

Interviewee will answer and discuss in depth some of the interviewer's questions prepared in advance The conversation is about the reasons why a company's fundamental (financial ratio) is good but the stock price is not as expected and the strategy of using fundamental analysis is more effective

In order to clearly determine whether financial ratios are reflected in stock prices in the stock market, in this study, we will select a specific company, and collect information on financial ratios Then compare financial ratios and the stock price of HPG in reality to answer the research question.

Triangulation in Research

The validity and reliability of study findings can be improved through triangulation (Cohen et al., 2000) Validity describes how accurately a study explains or evaluates the idea or ideas under consideration, whereas reliability refers to the dependability and persuasiveness of a study (Joppé, 2000) Cross-checking can help to ensure that fundamental deviations are generated by the use of a single method or observer by combining theories, methodologies, or observers in a study be resolved Triangulation also makes an effort to explore and analyze complicated human behaviors in a number of different ways in order to provide readers a more comprehensive explanation Both quantitative and qualitative research can use this technique to validate the results

Noble and Heale (2019) claim that triangulation is the process that improves the validity and reliability of the research In other words, the primary objective of triangulation is to validate research findings Cross-checks may combine techniques to meet the goal of confirming study findings Triangulation differs from mixed approaches, though Triangulation is the process of using all of the study's many ways to gather the necessary data and evaluate the research's conclusions, whereas mixed methods are essentially the combination of quantitative and qualitative research methodologies to handle research problems creating trustworthiness and credibility as a result

Data triangulation and source triangulation are accepted practices This study would suggest that the same data store, in this case copies of documents, could be analyzed using a variety of research analysis techniques (Laury, Mary, 2011) This concept is referred to as "triangulation of data analysis methodologies," and proponents claim that this triangulation improves the results' dependability It is plausible to argue that the analysis and interpretation of data are accurate if the results of one type of data analysis, like thematic analysis, are consistent with the results of another type of analysis, like correspondence analysis, performed on the same transcripts.

Empirical results

Financial ratios signals and price movement

In this section, this study will pick one company in VN30 which are rated one of the best on the current Vietnam stock exchange to get a lot of information about the company as well as to have clarity and transparency in the financial statements The purpose of this section is to test the effective of fundamental analysis

This study will choose the Hoa Phat company, which is a one of the top companies in the steel industry in Viet Nam The table 1 will show 6 ratios in six years to find out the financial situation and then make a prediction of Hoa Phat's stock price based on that financial situation

Table 1: HPG’s ratios from 2016 to 2021 (Source: SSI)

Based on the data in Table 1, there are 2 clear financial periods that are from 2016 to 2019 and from 2019 to 2021 The analysis below will clarify the financial position of the company in 2 periods based on financial indicators

During this period, HPG's EPS (earnings per share) plummeted from 7.83 to 2.72 EPS is earnings per share This ratio shows the profit earned per share of the company As the result, the lower the EPS is worse because it shows how profitable the company can make In the next period, EPS has improved significantly increasing from 2.72 from 2019 to 7.71 in 2021 This means that the company's profitability increases

The PBV ratio is used to compare a stock's price with its book value The P/B ratio shows how many times the stock price is above or below the book value of the business Lower value P/B ratios, especially those below one, signal to investors that a stock may be undervalued A P/B ratio greater than one means the stock price is trading at a premium to the company's book value Although this ratio of HPG is higher than 1 from 2016 to 2021, the increase and decrease in the PBV ratio are also meaningful PVB in 2016 was 1.76 and then increased to 3 in 2017 This could mean that the market is overestimating the book value of the public The reason the author thinks HPG's book value is overestimated is that the company's ROA and ROE ratios decreased from 2016 to 2017 (The author will mention more about the two ratios in the following paragraphs) From 2017 to 2019, the PVB index dropped sharply from 3 to 1.3 This proves that the market thinks that HPG's book value is decreasing in attractiveness However, similar to EPS, PBV also quickly rebounded from 1.3 to 2.52 from 2020 to 2021 This shows that the market has high expectations for this stock and the possibility that the company will be successful in the future As a result, investors are willing to pay more than the company's book value to acquire it

The P/E ratio is used to evaluate the relationship between a stock's market price (Price) and earnings per share (EPS) The P/E ratio shows how much money an investor is willing to spend in exchange for a dollar of profit on that stock In other words, it is possible to understand how much investors will pay for shares of the business based on their revenue So lower market expectations reduce stock prices HPG's P/E ratio increased sharply from 5.26 to 12.11 in 2016-

2017 This shows that investors agree to pay a high price for the company's shares However, a high P/E ratio is sometimes a sign of poor business performance, leading to low EPS leading to high P/E This is clearly a bad case because 2016 EPS is higher than 2017 From 2018 to 2019, the P/E ratio gradually decreased from 8.45 to 8.22 These two years EPS also decreased in these two years, so this is a sign that HPG is not performing well From 2020 to 2021, the P/E ratio continues to decrease from 8.22 to 6.63 in 2021 but the reason for the decrease in P/E is the increase in EPS from 2019 to 2021 This shows that the business is efficient The author believes that the above case is because leading to higher earnings per share during this period

So this is a good sign that increases the stock price

ROA and ROE of Hoa Phat in the period 2016 to 2019 decreased from 22.48 to 8.36 and 38.48 to 17.03 respectively A measure of a company's profitability per dollar of assets is called ROA (Return on Assets) The most crucial number for investors is ROE (return on equity), which assesses how much common shareholders can earn for every dollar invested However, both of these ratios were down, indicating a decrease in the company's profitability.In the period from

2019 to 2021, both these indexes also skyrocketed when ROA increased from 8.36 to 22.26 and ROE increased from 17.03 to 45.97 This shows that the use of capital of the company has become very efficient during this period of increase

From 2016 to 2019, this company's D/E ratio increased sharply from 0.67 to 1.13 Because D/E (Debt to Equity ratio) or debt-to-equity ratio measures how much capital a company has raised through borrowing compared to how much capital its owners have invested A high D/E ratio shows that a company borrows much to finance its operations If D/E is consistently high for an extended period of time, it indicates that the company's ability to pay back debts is challenging The company's debt repayment ability is also better in the period of 2019 to 2021, although the D/E ratio increased from 1.13 in 2019 to 1.22 in 2020 However, this ratio also suddenly dropped sharply to 0.96 in 2021

After understanding the financial situation through the indexes of Hoa Phat company, the author believes that the share price of Hoa Phat company will decrease in the period 2016 to 2019 because the ratios in these years are all bad It shows that the business situation of the company is not good From the period of 2019 to 2021, the company's stock price will increase sharply due to the strong improvement in financial indicators, showing that the company has overcome the difficult period and has a good business situation

To examine if Hoa Phat's stock price movement forecasts actually reflect financial metrics, the chart below should clarify these predictions

Figure 2: HPG's stock price movement from 2017 to 2021

During the first period (2016 to 2019), the chart shows that the company's share price increased from around VND3,000 to peak in early 2018 (17,000 VND/share) and gradually decreased to less than 10,000 VND in 2019 However, the financial ratios of the period 2016 - 2019 show that HPG stock is not really attractive to investors, all ratios demonstrate that the company did not perform well in the period from 2016 to 2019 For the next period 2019-2021, the company's share price was virtually unchanged 2019 despite the financial metrics being the worst financial year in five years At the beginning of 2020, it plunged nearly 7,000 VND/share, then rose sharply to more than 42,500 VND This reflects quite rightly when the company's financial indicators during this period improved strongly

In general, the results indicate demonstrate that the company's financial indicators do not always reflect the company's stock price movements; Specifically, in the first period from 2016 to 2019, although the financial indicators of “Hoa Phat” company tended to go down, the stock price increased in 2017 and kept the price very well in 2019 However, the next period from

2020 to 2021 shows a consensus between financial indicators and price movement; When financial indicators have markedly improved and turned better, the company's share price will increase strongly, especially at the end of 2021 when both the index and the stock price perform best There are several reasons why a company's stock price and financial ratios may not reflect each other and will be clarified in the next section.

The reason why do stock prices not reflect fundamental analysis and investment strategies

This research focuses on only one small aspect of fundamental analysis, the company's financial ratios However, for effective fundamental analysis, investors need to understand three basic concepts: macroeconomics, microeconomics, and businesses Macroeconomics is at the heart of the entire economy, including major national and global market events Macroeconomics focuses on issues related to economic growth, unemployment, inflation, and government fiscal policy Microeconomics includes content about narrow, decisive issues of individuals, from which to draw the law of supply and demand, consumption capacity, supply capacity of individuals or businesses in economy Finally, investors need to analyze the financial situation, management and strategy of the business to make a reasonable investment decision The fundamental analysis of micro, macro and corporate economy is very important for investors to make sound investment decisions and optimize investment returns Therefore, macro and micro factors also have a great influence on the company's stock price, resulting in the company's stock price not reflecting as financial indicators in a certain period

The author conducted an in-depth interview with an analyst of Mirea Asset securities company to understand the reasons why stock prices do not reflect specific financial ratios in the case of HPG

First, the analyst believes that micro and macro factors have a great influence on the company's stock price If researchers and investors just relying on the company's financial indicators, researchers and investors are not enough to make the right investment decision To be able to come up with strategies to optimize returns in investment, investors first need to assess economic and political events that directly or indirectly affect the industry Next, investors must understand the nature of the industry as stable growth, cyclical, customer behavior, and so on Finally, investors need to understand what kind of products the business deals in, the management of the business, the competitive advantage, and a number of other factors of the company

In the case of HPG steel company, this industry is in a commodity group (with a cyclical nature), so the stock price of HPG is very sensitive because it is easy to detect the change in the selling price of goods While financial ratios only represent past financial position, many times stock prices do not reflect financial ratios Therefore, for this industry group, it is difficult to use financial indicators to accurately assess the company's stock price

In the interview, the expert also said that in the period 2016 to 2019, there were a number of political-economic events (macro factors) that greatly affected business activities in many fields

To understand how these events affect the company, investors need to understand the nature of the industry as well as the company In short, investors need to assess the influence of factors outside the business Because economic, financial and political events affect the industry and then the business situation of enterprises For example, in the period 2016 to 2019, China tightened financial policies, censored real estate projects more tightly, causing the demand for construction materials (iron, steel, cement, ) decrease (Mirea Asset report, 2017) This not only makes the real estate industry difficult, but also entails the construction, steel, and other industries In addition, at the end of 2019, the event of the covid-19 epidemic also greatly adversely affected the economy (International monetary fund, 2019) These events have affected not only steel companies like HPG but almost the whole commodity industry as well However, the expert explained that even the factors show that it is very bad, but HPG is a reputable steel company, good management and has a competitive advantage so this could also be the answer why the stock price of HPG can grow during this period For more clarity, HPG's financial ratios can be compared with industry averages through the table below

Table 2: Compare financial ratios between HPG and average industry

Comparing HPG's financial ratios with industry averages, it's clear that HPG's financial ratios are much better than average for all periods

Another reason is that in the period from 2016 to 2019, the share price increased even though the indexes decreased because the company's share price was very low, it was difficult to decrease further At this time, the company's share price will maintain its price or increase slightly, although all financial ratios indicate that the company's business situation is not good

After the interview and experimental results, the author believes that if only based on financial indicators to invest, the profits will not be as expected However, the company's financial ratios still play an important role in investment To be able to improve investment returns, investors need to research and evaluate economic events, industries and businesses This is the most effective and complete way to apply fundamental analysis in making investment decisions In addition, in addition to reading and understanding financial ratios, investors can consider studying internal factors such as competitive advantages, management team to be able to choose a company that has the best value for money potential and best to invest In addition to fundamental analysis, Mirea Asset researchers recommend using a combination of fundamental analysis and technical analysis to achieve the best return on investment.

Conclusion

Summary of the empirical of research

Based on empirical results, it is clear that over certain time periods, a company's financial ratios may not be reflected in the company's stock price However, these financial ratios play an important role in assessing the company's business performance and influencing the investment decisions of investors However, these financial ratios are just one of many factors that affect a company's stock price This is clearly shown in the period 2016 to 2019 of HPG, when the financial indicators showed that HPG's business situation was not good, the stock price increased during this period The company's financial information may also affect the company's share price in some cases, such as the effect of financial information on the steel company's share price for the period 2019 to 2021 In summary, a company's financial ratios are an important factor in evaluating the company's business performance and influence investors' investment decisions, however, not always They also accurately reflect the company's stock price

By examining financial ratios and other business characteristics, fundamental analysis is a technique used to determine a company's value in the investment world Investors must examine a company's financial ratios, such as EPS (earnings per share), P/E (price-to-earnings ratio), ROA (return on assets), ROE (return on equity), P/B (price-to-book ratio), D/E (Debt to Equity), and other analytical indicators, in order to undertake fundamental analysis The examination of corporate financial ratios is one of the fundamental techniques for assessing business operations, financial health, and projections Nevertheless, there are other business elements besides just financial indicators report the company's financial standing The financial ratios of a corporation reveal details about its operational efficiency, financial stability, and financial status Fundamental analysis is a tool that investors can use to make wise investment choices Fundamental analysis, however, includes examination and evaluation of a company's business context and surroundings as well as other elements It goes beyond simply comprehending a company's financial figures impact the company's operations and financial status This aids investors in making knowledgeable financial choices and maximizing investment returns

Research question Hypothesis Research Findings

RQ 1: If the company has a good fundamental (financial ratio), the company’s stock price will always increase?

Financial ratios play an important role in excess stock returns

Company stock prices do not fully reflect financial ratios at certain periods

RQ 2: What are the reasons why stock prices do not fully reflect financial ratios all the time?

Besides financial indicators, stock prices are also affected by macroeconomic and micro-economic factors and events

Macro and micro-economic factors and events surrounding the business will also affect the company's stock price

RQ 3: How to increase efficiency in investment?

Understand and evaluate three factors: macro, micro, and enterprise

Assess the financial position of the business, macro and micro events that directly and indirectly affect the business

Table 3: Summary of research findings

According to the result and hypothesis, it shows that the financial ratios have a certain effect on stock price movement However, macro and micro factors and events also affect the price movement of stocks Therefore, in order to improve the return on investment, the author believes that it is necessary to study and evaluate all three factors of macroeconomics, microeconomics and enterprises.

Recommendations

After conducting research, the results show that if only based on the financial information of the business, it will not be possible to optimize profits, but also have to combine with other factors to make more effective investment decisions

The purpose of this study is to review the fundamentals so that investors can make the best decisions and strategies to maximize profits However, this is a short study on the financial index aspects of fundamental analysis and the movements of a company's stock prices, so it is not possible to cover all three aspects of fundamental analysis which are macroeconomics, microeconomics and businesses Therefore, in order to better understand fundamental analysis as well as to suggest more strategies and investment decisions, the author proposes short research papers followed by macro or micro factors The size of the company's surroundings influences and correlates with the company's stock price If there are enough resources, money and time, the author proposes a large research paper that can fully analyze 3 macro, micro and enterprise factors and show the correlation between these 3 factors to company stock price.

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