IMPACT OF FINANCIAL RATIOS ON STOCK RETURNS: AN EMPIRICAL STUDY OF SELECTED IT COMPANIES IN INDIA

The present study examined the relationship between selected financial ratios - Return on Equity, Debt-Equity Ratio, and Net Profit Margin - and stock returns of selected IT companies in India. findings indicate that these accounting-based variables do not have a statistically significant impact on stock returns. The correlation analysis revealed weak relationships, while regression results demonstrated low explanatory power and insignificant coefficients for all variables. This suggests that financial ratios, although useful for assessing internal performance, are not sufficient to explain variations in stock market returns. The statistically insignificant results can be attributed to several factors. Stock returns are inherently forward-looking and are influenced by a wide range of external elements such as investor expectations, market sentiment, macroeconomic conditions, and global economic developments. In contrast, financial ratios are based on historical accounting data and may not capture future growth prospects or market dynamics effectively. Additionally, the Indian IT sector is characterized by relatively stable profitability and low financial leverage, leading to limited variation in key financial ratios. This reduces their ability to explain differences in stock returns across firms. Furthermore, periods of heightened volatility, such as the COVID-19 pandemic, may have introduced abnormal price movements that are not aligned with fundamental financial performance. Another important explanation lies in the semi-strong form of market efficiency, where publicly available financial information is quickly incorporated into stock prices. As a result, by the time financial statements are released, the relevant information may already be reflected in market valuations, thereby limiting the predictive power of accounting ratios. In light of these findings, it can be suggested  future research should adopt a more comprehensive approach by incorporating market-based and variables such as market returns, interest rates, inflation, and firm-specific risk measures to better explain stock price behaviour. The use of advanced analytical techniques, including panel data models and asset pricing models like CAPM or Fama-French, may also enhance the robustness of results. From an investor’s perspective, reliance solely on financial ratios may not lead to effective decision-making; instead, a combination of fundamental, technical, and macroeconomic analysis should be considered to better understand stock market movements. Overall, the study highlights the limitations of relying exclusively on accounting information for predicting stock returns and emphasizes the complex and multifaceted nature of stock market behaviour.

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