An analytical perspective of financial statements in Malta as a basis for active analysis in equity investment

Abstract

As a part of the topic selected for my dissertation it was intended to assess the extent of fundamental analysis used by local stockbrokers of financial statements as a basis for selection of equity investments on behalf of clients. In particular, it is interesting to acknowledge that despite the theory of efficient markets in the real-world environment, local stockbrokers may still resort to active fundamental analysis to exploit perceived market inefficiencies and thereby spot profit maximising opportunities.

Therefore part of the dissertation attempts to answer the question of how to reconcile the notion that active portfolio management may still be necessary while markets are in equilibrium. In theory one can state that their belief in efficient markets (E. M) can pacify the investor and make it appear that no research effort by stockbrokers can be justified.

This extreme view is clearly unwarranted given the existence and success of several fund/investment management organisations the world over and a mini-survey to check the use of research was mailed to all local stockbrokers. This survey tries to obtain empirical evidence to justify the search for under-priced equity investments that local stockbrokers may still undertake irrespective of the EM theory.

Fundamental analysis focuses on the determinants of the underlying. value of the particular investment; such as ·current profitability and growth prospects. As part of the dissertation, it was intended to throw some light as to the extent that passive analysis is practised in Malta if any. Passive analysis is discussed in greater detail later on, however it suffices here to state that it is based on the notion of the efficient market hypothesis which suggests that one needs only to hold equity investments in a broad-based market index and make no attempt to outsmart the market . An attempt has been made to measure the extent that Maltese stockbrokers advocate the use of passive analysis. Of course this may be true for some advisors and less predominant for others. In the context of passive analysis it is arguable that provided risk and expected return are optimised then, active analysis has the advantages of lower servicing costs resulting from curtailing the conducting of extensive market research and the frequent purchase and sale of equity investments with attendant brokerage fees.

All registered stockbrokers were mailed a copy of the mini survey and subsequent follow up calls were made to collect the completed documents, with the intention of drawing some conclusions as to the propensity towards active as opposed to passive investment strategies. Assuming that some fundamental analysis is conducted as a basis of an active strategy, the middle chapters deal with various analytical techniques within the framework of financial statements. One hopes that a better insight is given into the ways of improving the analysis of financial statements through the use of accounting ratios with particular references to published accounts as viewed in the light of recent accounting standards.