Study of the relationship between profitability ratios and stock prices : evidence from the technology sector from Nasdaq composite index

Abstract

This study aims to explore the relationship between profitability (measured by the ratios: ROA, ROE, GPM, OPM, NPM, and EBITDA Margin) and share price of technology stocks as studies into whether fundamental financial factors influence technology stocks are rare due to researchers instead preferring to study more technology inclined factors due to a greater guarantee of the overall influence, they have which in turn creates a logical blind spot. Overall, this study aims to improve the understanding of what influences technology stocks. To achieve this data obtained is based on the Nasdaq Composite Index for the time-period 2007-2019 utilising quarterly data with his time frame being used to observe the post crises market while excluding the impact covid-19 has had recently. With this data then being utilised in the multiple regression model to estimate the relationship between the independent variables (profitability ratios) and dependent variable (share price) by using the Cross Section-Time Series (Panel Data). The study found that of all factors tested only ROE- Return on Equity had any level of significance, found to be significant at both the 10% and 5% level of significance, thus having a relationship with share price at these levels. This entails that overall profitability does not influence the share price of technology stocks but rather the influence is more dependent on what the ratios themselves represent. However, it was further noted that the model tested only managed to explain 2.4904% of the dependent variable’s variability making the influence this model has on share price nearly negligible. What this suggests is that while ROE has a relationship to the share price of technology stocks, it is not that important of a factor as it explains so little of the data.