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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<b>A STUDY OF FUNDAMENTAL ANALYSIS (FINANCIAL RATIOS) EFFECT TO STOCK PRICE IN REALITY AND REASONS THE STOCK PRICE DOESN'T REFLECT FINANCIAL </b>

<b>BOLTON BUSINESS SCHOOL </b>

The university of Bolton Date: 01/May/2023

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<b>ACKNOWLEDGEMENT </b>

First of all, I want to give a sincere thank you to Dr. Smith and Mrs. Trinh, my supervisors in Bolton and Vietnam respectively, for giving me advice I needed to finish this dissertation on time.

I want to express my gratitude to all of the lecturers from the CIC department at Bolton University and Banking University. They provided knowledge, genuine and sound advice, and encouragement to me, and for that, I am incredibly appreciative and owe them a debt of gratitude.

I am sincerely appreciative of the replies who gave up their time to assist me in completing the interview.

Finally, I want to thank my parents for their support, encouragement, and enthusiasm. I'm also appreciative of my partner's support during this endeavor.

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<b>ABSTRACT </b>

The purpose of this study is to examine the effect of fundamental analysis (financial ratios) on the change in the stock price of the company in practice. In fact, the stock price does not reflect the company's financial indicators, this study will give some reasons and investment strategies to optimize the return on investment.

The design/methodology/approach-The research method is to use the financial statement information of the company listed on the Vietnamese stock exchange that has been public to assess the company's performance. Then compare with the company's stock price movement. Consult an expert on cases where company stocks don't reflect financial ratios and make some recommendations on investment strategies. Findings-Empirical results show that although financial ratios have an effect on the company's stock price movement, in some periods the company's stock price does not reflect the ratios because the economic conditions, industry factors and other events. Practical Implications - The meaning of the study is to show the importance of financial indicators in practice investment. Originality/value- Gives investors a better view of financial indicators in investment as well as suggests some strategies in investment.

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<b>II. Literture review ... 10 </b>

<b>1. The stock market. ... 10 </b>

<b>2. Fundamental analysis ... 10 </b>

<b>3. Financial statement assessment. ... 12 </b>

<b>4. Financial ratios group. ... 13 </b>

<b>III. Research Methology ... 17 </b>

<b>IV. Empirical results ... 23 </b>

<b>1. Financial ratios signals and price movement</b> ... 23

<b>2. The reason why do stock prices not reflect fundamental analysis and investment strategies. ... 26 </b>

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<b>Lists of Tables </b>

Table 1: HPG’s ratios from 2017 to 2021

Table 2: Compare financial ratios between HPG and average industry Table 3: Summary of research findings

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<b>Lists of Figures </b>

Figure 1: The research Onion Framework (Saunders et al, 2009) Figure 2: HPG's stock price movement from 2017 to 2021.

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<b>I. Introduction 1. Background </b>

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

<b>Asset presence (Mirea Asset, profile). </b>

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<b>2. Rationale </b>

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.

<b>3. Objectives </b>

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.

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<b>4. Limitations. </b>

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.

Review fundamental analysis base on financial statements.

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

<b>Giving some strategies to improve more investment performance. </b>

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<b>II. Literture review 1. The stock market. </b>

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.

<b>2. Fundamental analysis </b>

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

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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.

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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.

<b>3. Financial statement assessment. </b>

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

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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).

<b>4. Financial ratios group. </b>

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

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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:

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EPS: 

<small> </small>

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:

P/E: <small> </small>

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:

ROE: <small> </small>

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:

ROA = <small> </small>

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

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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:

D/E: <small> </small>

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)

PBV: <small> </small>

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

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<b>III. Research Methology 1. Introduction</b>

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)

<b> </b>

<b>2. Research Philosophy </b>

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

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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

<b>3. Research Approach </b>

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).

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