Download The concept of financial analysis

Islamic University – Gaza
Faculty of commerce
Department of Accounting
‫الجامعة االسالمية – غزة‬
‫كلية التجارة‬
‫المحاسبة باللغة االنجليزية‬
The role of the financial information analysis to
predict the prices of shares
An Empirical Study on enterprises listed on the Palestine Securities Exchange
A Graduation Research
Presented to the
Faculty of Commerce
The Islamic University of Gaza
By
Hammam H. Alkhlout
Islam R. Alagha
Supervisor's name
Mr. Salah Shubair
August/2013
0
‫‪A Holy Qur'an Verse‬‬
‫}وقل اعملوا فسيرى هللا عملكم ورسوله والمؤمنين{‬
‫صدق هللا العظيم‬
‫سورة التوبة – اآلية ‪501‬‬
‫‪1‬‬
Table of Contents
Introduction -----------------------------------------------------------------------------------------------4
Statement of problem -----------------------------------------------------------------------------------6
Objectives ---------------------------------------------------------------------------------------------------7
Main objectives-----------------------------------------------------------------------------------------7
Specific objectives------------------------------------------------------------------------------------ -7
Significance of the project--------------------------------------------------------------------------------7
Scope and limitations ------------------------------------------------------------------------------------8
Variables of the study--------------------------------------------------------------------------------------8
Previous studies --------------------------------------------------------------------------------------------9
Hypotheses ------------------------------------------------------------------------------------------------13
Methodology -----------------------------------------------------------------------------------------------15
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Introduction
The financial markets play a role in economic activity in terms of function, whether in
developed countries or developing countries, they operate vessels to collect savings and
employ them in the form of liquid investments in the financial and monetary market.
Usually investors try to avoid risk in their investments, through the diversification of the
components of investment portfolios that they own, even easier for them to also convert a
portion of these investments to funds, capital, and at the same time ensuring the largest
possible return, is also investing in securities property right, as is the case for to acquire
shares or debt rights such as bonds (Zubi, 2004, p: 187).
Financial analysis has appeared since the onset of the financial function as an independent
function like the rest of the other functions of the facility when field studies were
conducted using analysis in the study of the financial situation of the facilities. That was in
the United States in 1900, when the study was conducted on 981 companies through the
use of seven financial ratios to study the situation of these companies, it also accompanied
the developments that took place in the job accounting and financial alike so that became
after World War II, the basic rule, which was launched from the function of financial
management and job accounting to become an integral part of the financial management
and separate topic in itself taught in universities. Schools specialized in the field of money
and the economy (syah and Ameri, 2003, p: 4)
And defines financial analysis as a "processing of financial data available on the institution
in order to obtain such information used in making decisions and in evaluating the
performance of business and industry in the past and the present as well as in the diagnosis
of any problem exists, (financial or operational) and anticipate what will be the situation in
the future "(Karajeh and others, 2002, p: 52).
Thus, the financial analysis includes the Interpretation of Financial Statements published
and understand it , and that is being prepared according to the rules and principles defined
in accordance with the accounting principles generally accepted, with the help of other
data further in the light of certain considerations and specific purposes, in order to
evaluate a particular decision or the study of investment opportunity where they can
through it evaluation of financial and investment performance of the facility and then stand
on the truth and predictability its shares prices, whether a comprehensive assessment of all
or part of a facility (such as liquidity analysis or evaluation of profitability, and so on…
3
That drives all businesses to attention to improving the views of those lists in terms of
shape and expressions used, as well as the content or the content of reports in terms of the
quantity and quality of accounting data used hand assessment methods on the basis of
which is the preparation and presentation of those lists. (Lutfi, 2005, p: 641).
In light of the foregoing, it can be said that it is important requirements for predicting
stock prices installations is the application of accounting principles and increase disclosure
and transparency, and to show the data and information that reflect the real financial
situation of the economic facilities.
As the market Palestine Securities Exchange market emerging and promising compared
with the regional financial markets nearby, and that the culture of investment in these
markets are fairly new to the investor Palestinian, and therefore, the investment decisions
of most traders in this sector, led by small investors is based on the view and analysis, so
this study is trying to Provide a minimum of analysis and information that benefit the
investor when making decisions away from speculation or rumors.
Statement of the problems
Clear from the foregoing that to preserve the rights of stakeholders, particularly investors,
existing and prospective, that requires the provision of confidence in the financial
information contained in the reports and financial statements, so it came this study was to
look at the role of the financial analysis of financial information published in the financial
statements for predicting stock prices, and here, the main question of the study is:
- What is the role of financial analysis of published financial information in the financial
statements to predict stock prices?
And is derived from this question the following sub-questions:
- What is the role of liquidity in the financial analysis to predict stock prices?
- What is the role of profitability ratios in the financial analysis to predict stock
prices?
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- What is the role of debt ratios in the financial analysis to predict stock prices?
- What is the role of activity ratios in the financial analysis to predict stock prices?
- What is the role of the market rates in the financial analysis to predict stock prices?
Objectives
Main objective
-Clarify the role of financial analysis of published financial information in the financial
statements for predicting stock prices
Specific objectives
- To identify the dimensions of the financial analysis and its advantages and how to utilize it
to predict stock prices.
- Formulation of the intellectual aspects of financial analysis and take advantage of them in
developing the concept and criteria to predict stock prices.
- Understand the financial implications of the analysis process on the quality of financial
information published in the financial statements of the facilities whose shares traded on
the Palestine Securities Exchange.
- Preparation of a quantitative model can be relied upon to determine the share price for
each sector of the Palestine Securities Exchange.
Significance of the project
The importance of this study is that they are looking at the financial analysis of the facilities
that are trading their shares in the financial market and because the activity of the financial
market in any country reflects the economic activity in the state, so we find that there are
economic and political factors affect the behavior of investors, and the performance of the
financial market, so it comes study to confirm the importance of financial analysis and its
role in predicting stock prices, which achieves advantage in the development of the
practice of accounting and audit work, and thus achieve the quality of information in the
5
financial market to me which is reflected on the decisions of investors and stock market
movement in Palestine.
Scope and limitations of the project
- The application of this study is limited to the facilities listed in the PSE Securities which
financial statements are available through a series of time from 2010 until the end 2012
- Have been dealing with the variables of the study by the possibility of availability
According to the figures and financial statements that have been disclosed and clearly
included in the published financial statements of each sector facilities.
Variables of the study
First: the dependent variable
Share price
Second: the independent variables
Liquidity ratios
Profitability ratios
Debt ratios
Activity ratios
Market rates
6
Previous studies:
1) Badri and Khoury study, 1997
Entitled: "The study of the movements of the stock in the Amman Financial Market using
standard models"
The study aimed to identify the movements of the stock in the Amman Financial Market
using standard models, based on the analysis of information quarterly during the period
between the year 1994-1978 has shown estimates standard models presented in this study
that there is a statistically significant relationship between movements in stock prices and
some of the variables macro-economic, as the number of the consumer price index and the
index for the amount of industrial production, which reflects the level of economic activity
in Jordan. While the study did not show a statistically significant effect of other
macroeconomic variables as a criticism show, and interest rates, the exchange rate of the
Jordanian dinar against the dollar, which means that the Jordanian investor does not rely
on this information in economic decision-making venture.
2( Al dabay and Nassar Study, 2001
Entitled: "Is precede stock prices accounting profits in reversing the appropriate
information to determine the value of the facility?"
The study aimed to test whether stock prices precede accounting profits in reversing the
appropriate information to determine the value of an entity in the ASE, how the aim to
determine the number of fiscal periods preceding the prices accounting profits, in the
reverse of that information, and to measure the improvement could be entered on the
relationship returns profits when measured asynchronously.
The study used a representative sample of the industrial and service companies listed on
the ASE, 1998. The results of the regression models - The study covered the period
between 1991 carried out, that stock prices preceding the accounting profits in the reverse
information for a period extending to the three previous years, as well as the results
indicated enter returns previous financial periods when measuring the relationship returns
profits improves the strength of the relationship , both in terms of transaction response
7
estimated earnings, or in terms of adjusted returns, when you enter returns three previous
financial periods in the form of a relationship, rose plants in response earnings estimate by
61% (on average), and increased adjusted returns 45% (average), as well as closer
transactions in response estimated earnings, worth expected, amounting to 10.75, at the
breadth of a window measuring the return, we have reached the highest value for the
coefficient response profits estimated 7.15, so when you enter returns three previous
financial periods in the model, and therefore the study concluded that stock prices ahead
(on average ) profit in reverse appropriate information to determine the value of the
facility with three financial years, and stock prices for the previous fiscal periods is the
importance of the prices of the current period, and can be used to predict future profit
entity.
3) Wright, Ken study, 1996
Entitled: "The role and importance of accounting information when making decisions in
stock"
The study examined the role and importance of accounting information when making
decisions in stock in order to increase awareness of the behavior of investors and the
application of capital markets in Britain, has adopted the study lists of questionnaires that
were sent to a group of executives to evaluate the accounting information, and concluded
that the accounting information of importance when evaluation and comparison between
different types of economic units shares (stock) in order to assist the investor when
making investment decisions.
4) Jennifer & Liu study, 1997
Entitled: "Re-purchase of open market shares and re-assessing the accounting information"
This study identified the reaction or the extent of the interaction of the open market with
the published accounting information and the impact of this information on the share buyback, has been 1992 has been reached - the use of a sample of 335 market during the
period between 1978 to that market is influenced by the information published accounting
which affect Jennifer & Liu published information on the growth of sales facilities and profit
accounting, as well as there is a relationship between the market's response to the
8
accounting information and to buy back stock, as the study found that the relationship
between the market reaction and accounting information previously published more
accurate and effective for small-sized enterprises.
5) Shenbagaraman study, 2003,
Entitled: "Is futures and options trading increases the volatility of stock prices?"
This study answer the following question: Is the conclusion of futures contracts and
financial options in secondary markets Organization (stock exchanges) will exacerbate the
instability of the stock index in the stock market pain mechanism Indian was reached
several conclusions was the most important that there was no effect for the conclusion of
derivative contracts financial (futures and options) on the instability of prices in the stock
market of India, as the arrival of the flow of information to the financial market and being
available to all dealers where or not is affecting the performance of the market, and
derivative contracts play a very important role in the process of price discovery and
achieve perfect feature of the financial market in addition to its role in risk management.
6) Khalayleh and Estanpoly Study, 1997
Entitled: "The effect of the change in capital expenditures on the stock prices and
movement: a field study on the Jordanian public shareholding companies"
The study aimed to test the impact of the announcement of the change in capital
expenditures by companies Jordanian public shareholding prices and the movement of
stock trading for those companies, which included the study sample 39 public shareholding
company Jordanian in industry and banks, at (125) event led to the change capital
expenditures in those companies during the period from 1988-1993. Event window was
used relatively short span of four weeks and is based on the history of the announcement of
capital expenditures, to track the impact of the announcement of these expenses on both
stock prices and trading volume.
The results of the study showed a negative impact statistically significant change in the
expenditure of capital on the share price, on the date of the occurrence of the event leading
to this change with small-sized companies, while this was not statistically significant effect
of the large-sized companies.
9
The results of the study as well as the positive impact of the change in capital expenditures
on the volume of trading in stocks, as observed increase in trading volume during the event
window, but this effect was not statistically significant.
7) Ershaid study, 2004
Entitled: "The determinants of stock prices in the Amman Stock Exchange"
The study aimed to identify the determinants of stock prices in the Amman Stock Exchange
within the overall framework, and the focus was on the nature of the relationship between
the index of stock prices as the dependent variable in this market and the variables reprise
congenital College for the period (1997-1978), through the adoption of a mathematical
model and use the gradient method.
Findings have shown by computer and existence of spirits relationship with statistical
significance between the number of stock prices as the dependent variable and the
following independent variables: the index of industrial production, inflation, money
supply. And the lack of statistical significance between the record and all of the discount
rate and the exchange rate.
8) Nejm Study, 2006
Entitled: "The extent of investors' perception on the Palestine Securities Exchange
importance of the use of accounting information to rationalize their investment decisions"
The study aimed to identify the perception of investors in the market, the Palestine
Securities Exchange of the importance of the use of accounting information to rationalize
their investment decisions and tried to answer on the issue, which were represented in the
test perceptions investor of the importance of accounting information and the adequacy of
such information in the financial reports and the extent relied upon in rationalizing
investment decisions and be a community sample the study of the categories of investors in
the market for Palestine and the sample of the study vocabulary from all categories of
investors in the market of Palestine who are in the Gaza Strip, and reached the study
sample (185) investor, has shown results of the study that investors in Palestine realize the
importance of the use of accounting information to streamline their investment decisions,
10
and that the accounting information contained in financial reports is sufficient and are used
in the investment decision, and that there is other information not included in the financial
statements affect the investment decision, as well as there are constraints limit the use of
accounting information in the rationalization of investment decision.
Hypotheses:
The first major hypothesis:
There is a statistically significant correlation between financial analysis and liquidity ratios
to predict stock prices.
The following hypothesis:
The higher the percentage of share price increased trading in the stock market.
The second major hypothesis:
There is a statistically significant correlation between the financial analysis of profitability
ratios and forecasting stock prices.
Are derived from the following sub-hypotheses:
The higher the rate of return on assets has increased the share price in the stock market.
The higher the rate of return on equity increased share price in the stock market.
The greater the profit to sales ratio increased share price in the stock market.
The third major hypothesis:
There is a statistically significant correlation between financial analysis and debt ratios to
predict stock prices.
11
Are derived from the following sub-hypotheses:
The higher the ratio of liabilities to equity share price fell in the stock market.
The higher the ratio of debt to equity ownership decreased pain share price in the stock
market.
The fourth major hypothesis:
There is a statistically significant correlation between financial analysis and activity ratios
predict stock prices.
Are derived from the following sub-hypotheses:
The higher the percentage of total assets turnover increased share price in the stock
market.
The greater the proportion of total turnover of current assets increased share price in the
stock market.
The greater the proportion of total turnover of fixed assets increased share price in the
stock market.
The fifth main hypothesis:
There is a statistically significant correlation between the financial analysis of the market
rates and to predict stock prices.
Are derived from the following sub-hypotheses:
The higher the ratio of earnings per share achieved increased share price in the stock
market.
12
The higher the ratio of market value to book value has increased the share price in the
stock market.
The higher the percentage of the share price in the market to earnings per share of profits
increased share price in the stock market.
The higher book value increased share price in the stock market.
Research Methodology:
We will follow a descriptive approach that consists of:
1. Theoretical study:
The descriptive approach will be used to collect data and information about the problem of the
study based on previous studies, references, books…
2. Field study:
Test of 13 financial ratios to a sample of 10 facilities listed its shares on the Palestinian fiscal
market for the period between year 2010-2012, depending on the data of balance sheet and profit
and loss account.
13
Chapter Two
Financial Analysis and it’s modern trends
14
Introduction Chapter:
This chapter deals with the discussion and analysis of the general framework for financial
analysis through two sections:

Section I: The address to discuss the concept of financial analysis, definition, its
history, the reasons for its creation, its tools and its desired goals.

While the second part addresses: financial analysis methodology, it’s steps , it’s
criteria ,it’s conditions , the beneficiaries of it, its components , its determinants and
its future outlook.
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First section
Financial analysis, Creation and development
Introduction:
Financial analysis is the process of interpretation of the items contained in the
published financial statements in order to obtain useful information to many
destinations who stopped their decisions on the data shown by those lists of
facility management, shareholders and creditors ....... etc. to contribute to take
the necessary decision, so it will be discussed the analysis of these issues
through the following:
Concept and definition of financial analysis.
The reasons for the creation of financial analysis.
Development of financial analysis.
Financial statements used in the financial analysis. ·
The objectives of financial analysis. ·
Data should be available for a good financial analysis. ·
Financial analysis applications.
Financial analysis tools.
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The concept of financial analysis:
Financial analysis is one of the areas of modern and sophisticated knowledge
and after the analytical ,critical, depth and extended studying to all elements
of the financial statements (published) or some of them, after appropriate
reclassifications for them using various methods of analysis depending on the
quality of economic entity (or administrative). As seen by some researchers to
financial analysis from another angle as a set of analytical tools and methods
that are applied to the financial statements contained in the published
financial statements for certain establishments for the purpose of access to
the best decision (Hassani, 1995, p 210).
And financial analysis is knowledge of the rules, criteria and foundations
where interested in collecting data and information on the financial
statements of an entity and make a necessary category, and then subjected to
a detailed and accurate study and find a connection and the relationship
between them, such as the relationship between the current assets, which
represent a liquidity in facility and the current liabilities, which are short-term
obligations on facility and the relationship between ownership money and
long-term liabilities as well as the relationship between income and
expenditure and then interpret the results that have been reached and the
search for causes and to discover the strengths and shortcomings of the plans
and financial policies as well as to evaluate the control systems and the
development of solutions and the necessary recommendations in a timely
manner(Assar& others , 2001, p 151).
From this it is clear that the analysis of financial means and an important tool
of the tools that are used in the analysis of facilities business, and in the light
of the results of analyze can predict the future and making wise decisions.
17
There are several definitions of financial analysis, including the
following:
Matar defined financial analysis as "a process by which exploration or
derivation of a set of qualitative and quantitative indicators about the activity
of economic project contributes to determine the significance and properties
of operational activities and financial for the project, and through the
information extracted from the financial statements and other sources in
order to be the use of these indicators in assessing the facility performance in
order to make decisions” (Matar, 2003, p 3).
Rugby was defined as "the means designed to define a set of relations or
standards in the form of financial ratios or trends summarizes the activities of
the project operational, investment and financing, as shown by the financial
statements and other information sources to explain, interpret and put it at
the service of the decisions of the relevant authorities"(Rugby, 1998, p 7).
As Aql defined of financial analysis as "the process of addressing the financial
data available on the institution to obtain information used in the decisionmaking process and evaluate the performance of business and industry in the
past and present, as well as in the diagnosis of any problem exists (financial or
operating), anticipating what will be the situation in the future will require to
achieve such a goal to do The process of collecting and correction of the
financial statements and submit them briefly and commensurate with the
decision-making process "(Aql, 2000, p 279).
While Momani see that financial analysis is "a detailed study of the financial
reports in order to stand on the strengths and weaknesses centers in these
accounts and diagnose problems in order to find solutions to them is a study
of the historical information to determine the past and future.”(Almomani,
2003, p 63).
18
The reasons for the creation of financial analysis:
There are many reasons had an active role in the creation of the financial
analysis and contribute to upgrading it over time as the scientific literature
indicate that the emergence of the financial analysis is due to several factors,
including:
 Industrial Revolution:
With the advent of the Industrial Revolution in Europe show the need for the
huge capital of establishment of factories, processing and financing of the
production process in the pursuit of profits and economies of scale, and thus
the evolution of the size of the project of economic and individual enterprises
small to plant a significant contribution to pool savings of thousands of
shareholders to invest on a large scale, have been forced these shareholders
due to lack of expertise to delegate the authority to manage the facility to the
independent board and became financial statements primary means to follow
the conditions of the facility and the success of the administration in carrying
out its mission and therefore there is a need to analyze these lists and
interpret the results, to identify areas of strength of the entity or its
weaknesses or the strength of its financial position As a result of its work.
(Najjar 1993, p 20)
19
 Financial markets:
Interested in the financial markets often investors in stock, they are more
parties in order to achieve profit as a result of their investment in the stock, as
they are more parties presented a risk and therefore investors need current
and forecasters to accurate information about the reality of Manchu s business
that is trading its shares on the financial market and to satisfy those investors,
therefore, the financial markets have focused on analysis of the accounts of
businesses to determine the financial strength of these facilities or its
limitations, and in the light of the results of the analysis moves supply and
demand for securities in the market (Al-Zubaidi, 2000, p 23).
 Government intervention in the view of the data in the financial
statements:
Since the success and continued existence of contributed facilities depends on
confidence of shareholders, so it has intervened governments, by doing the
issuance of legislation need to audit the facilities by an outside observer, in
order to ensure the protection of the masses of investors, as stated in this
legislation also determine how to display the data the financial statements
and the extent of detail where required to ensure that give a clear picture of
the shareholders about the financial position of the entity and the results of its
operations, which helped in the need to analyze those financial statements.
(Najjar 1993, p 20)
 Credit: ·
I've had to spread method of short-term financing for periods not exceeding
one year has pushed commercial banks to the need to assess the safety of the
financial position and cash facilities requesting for this type of credit, so there
is a need to analyze the financial statements and in the light of the results
given bank loans and credit facilities of different or refuse to grant the type of
20
facilities. That has created a lot of banks and special mission units conducting
financial analysis of student facilities to help banks. (Al-Zubaidi, 2000, p 23)
The evolution of the financial analysis:
Expansion of the organization business and transformation from persons
facilities to money facilities and breadth of its activities and its growth and
development, whether the expansion in investments or mergers with other
facilities, has had a direct impact on the evolution of the financial analysis in
appropriate with the size of the development in constructions, as it was for
the development of accounting information systems and informatics systems
major role in development of the financial analysis operations, as shown in
Figure (1) the old entrance to the financial analysis as shown in Figure (2)
contemporary entrance to the financial analysis.
Figure (1) the old entrance to the financial analysis
Total or partial
performance
Multiple financial
Indicators and ratios
Financial
analysis
Source: (Hassani, 1995, p 23)
21
Financial
statements
Figure (2) contemporary entrance to the financial analysis
Financial
statements
Data and information available for
financial analysis
Financial and nonfinancial, internal
and external data
and information
The purpose of
financial analysis
Financial analysis
The adequacy of
available
information and
data
Financial analysis
tools
Financial Analysis
Results
Signs and indicators that provide a suitable
ground for trade-off between the available
alternatives
Rational decision-making, and draw the best
policy.
Source: (Hassani, 1995, p 23)
22
Evidenced by the previous forms that the process of financial analysis has
evolved over time to become a good tool to give clear indications thus
contributing to the wise decision-making and optimum policy-making, where
limited process of financial analysis in the past to do the analysis of financial
statements, and then extract multiple indicators and financial ratios, whether
these indicators measure the total or partial performance of an entity, But this
the analysis evolution became based on the analysis of financial statements in
addition to access to financial or nonfinancial and internal or external data
and information, and then carry out a study of the adequacy of the available
data and information and choose the necessary tools to carry out the analysis
and setting specific goals to reach to the results are considered signs and
indicators provide appropriate ground to choose between the alternatives
available to make good decisions and optimal policies to improve
performance.
Financial statements used in the financial analysis:
The information derived from the accounting records of the facility and especially financial
statements that reflect the results of what happened during a specific period of time is the
raw material to be addressed by the financial analyst which concludes his observations and
conclusions and these lists are:
Statement of financial position:
This list is a statement of the financial position of an entity at a certain date, which is
usually the end of the period (one month or fiscal year) and so-called statement of financial
position where clarify property of the entity or its assets, which is equal obligations on the
facility and equity (Kabbani, 2005, p 34).
23
Income Statement:
Is a list of income or profit and loss account and a balance is achieved by an entity of the
profit or endured the loss during a specific time period called the accounting period is to
reach a net profit subtracting total expenses from total revenues which are affected by the
view of the accountant in accordance with the policies and methods of computation
adopted in the entity.
For the purposes of the analysis are typically relying on several accounting periods so that
extrapolated financial analyst in detail. (Abdul Hadi, 2000, p 107)
Statement of Cash Flows: ·
The statement of cash flows shows the analytical monetary changes that have taken place
in the entity, whether an increase or decrease and to identify the reasons for these changes,
which view each cash inflows as well as cash outflows.
Analysis of Establishment:
the main hypothesis to the financial analysis is that the share price for the facility is
affected by their performance, after identifying industries most attractive for investment,
the financial analyst evaluates the financial situation of facilities within these industries,
sees the prospects for change in the long term in the profits of enterprises have an impact
on distributions, and therefore the price share this property, if it was expected that
profitability of the entity higher than what is required or expected by the stock index, that
pays a lot of investors in this case to buy shares of the facility, prompting its shares to the
high prices (Hanafi, 2003, p 221-222).
24
Data should be available for a good financial analysis:
In order to get good financial analysis meets the desired goals of it, and also meets the
requirements of the beneficiaries must be several data are available as follows:
- Studying the company's budget for a number of years (at least three years) as well as the
list of profit and loss.
-Knowledge of accounting policies followed by the company (depreciation, provisions,
inventory .....).
- See the analysis for each item of the balance sheet and income statement.
- See Management Report and the Auditor's report.
Other complementary data:
- Study and identify the administrative leadership of the company to understand the
company's activities and financial condition.
- Data on the financial situation of the company and its relationship with financial
institutions and banks.
- Data on the external factors affecting the company's activities, such as inflation and
recession.
- Study the facts that occurred after the preparation of the final accounts.
25
Objectives of Financial Analysis:
Each work always has a goal, there is an urgent desire to reach it and to achieve, and is a
financial analysis in itself an effective way to know the nature of the links and relationships
between elements of different project and its assets vocabulary and its opponents
vocabulary and revenues and expenditures in order to reach specific goals.
As a result, financial analysis centered objectives in meeting the goals of the following:
(Saaydh and Fred, 2004, p 110)
- Show the financial status of the company in his true form
- Identify the entity's ability to borrow and debt service benefits.
- To judge the efficiency of management.
- show the enterprise level and status in the industry or sector to which it belongs.
- To assess the feasibility of investment in the facility.
- As seen (Mind, 2000, p 278) that the assessment of the financial and operating policies
used and take advantage of the information available to decision-making control and
modification, as well as to identify trends taken by the organization's performance is one of
the objectives of financial analysis.
Financial Analysis uses:
There are several uses for financial analysis of each depend on the type of analysis required
and who use this analysis, the most important are:
Credit Analysis:
This analysis done by the lender and aims to identify the debtor's ability to repay or meet
its financial obligations (Aldowri and Zennad, 2003, p 12) .
26
Investment analysis:
This analysis is used in the evaluation of investment in facilities shares and loan bonds and,
therefore, assesses the institutions themselves and the benefit for individuals and
enterprises (Karajeh and others, 2002, p 132).
Merger analysis:
If the facility desire to buy another facility, the buyer facility do the evaluation process, and
the estimate value of the facility desired to purchase, as estimated future performance of
her, at the same time holds the financial management of the facility sold to do the same
analysis process in order to assess the offer and judge on its suitability to them. (Brigham,
& Houston, 2000, p8(.
Financial Planning:
Financial planning is one of the most important administrative functions and this process is
to put a vision for the performance of the facility is expected in the future and here a
financial analysis tools play an important role in this process in terms of the assessment of
past performance and estimate the expected performance in the future (Assar and others,
2001, p 152).
Financial analysis tools:
Financial analyses of the published financial data is consider a method which enables
investors to develop a set of indicators for financial activities of an entity and used in this
analysis, multiple tools are as follows:
27
Vertical analysis:
The vertical analysis is concern about the study of quantitative relationships between
financial statement items on certain date, and this type of analysis describe as rigid and
consistency, and despite of his help in evaluating the performance of an entity in a given
period and the discovery of the strengths and shortcomings, but it remains a need to
support the horizontal analysis. (Abdul Hadi, 2000, p 103)
Horizontal analysis:
Is this kind of analysis in the study of the behavior of each item of the financial statements
over time which track the movement of the item increase or decrease over time, and thus it
is dynamic analysis because it shows the changes that have occurred in a relatively long
period of time. (Kahlout, 2005, p 31)
Analysis by financial ratios: ·
Analysis of financial ratios by finding the relationship between two variables share
common characteristics to judge on a specific activity of the entity (Syah and Ameri, 2006,
p 52).
From the above it is clear that there is more than a tool for financial analysis but the best is
analysis by financial ratios because this analysis is able to forecasting processes because it
is based on a study group of variables that have common characteristics as ratios that
measure profitability or ratios that measure activity and not, as in the horizontal analysis
measuring elements of financial statements according to one element or elements of their
data.
28
Second section
Recent trends for financial analysis and future outlook
Introduction:
After it has been exposure in previous section to the nature of the financial analysis in
terms of the concept and the reasons for its establishment, its objectives and its
development and data that must be met to obtain a financial analysis good, it is useful to
identify the methodology of this analysis and the steps and standards and the beneficiaries
of it, and its future outlook as follows.
Financial Analysis methodology ·
The steps involved in the process of analysis ·
Financial analysis standards and uses ·
Financial Analysis terms and conditions ·
The beneficiaries of the financial analysis process ·
Determinants of Financial Analysis ·
Recent trends for financial analysis ·
The future Outlook for financial analysis.
29
Financial Analysis methodology:
Financial analysis methodology means those scientific steps followed in analysis, which
vary from one facility to another and from one analyst to another according to the aim of
the analysis process (Shdifat,2000 , p 96).
And financial analysis is a set of methods and techniques and procedures used by the
analyst in conducting analysis of the financial statements in accordance with the principles
and general basis that must be taken into account for the completion of the analysis
process allows him to achieve the desired goal, which is in the following points: (Assar &
others, 2001, p 155)
The objective of the financial analysis process:
Determined objective of the analysis process in the light of the existing subject or problem
of the facility so that it enable the analyst to gather information and provides the same
effort and costs, for example, if offers a customer request for a loan from a commercial
bank becomes a primary goal of the financial analyst is to know the extent of the finance
ability for this client to repay the loan on time.
The time period covered by the financial analysis:
In order to achieve the objectives of financial analysis operations it must include the
analysis of the financial statements for several years, as the financial statements prepared
for one fiscal year may not be enough to get them the data that helps the analyst to judge
on the performance of the client.
The quality of information needed by the analyst to reach its goals:
Can get the information needed by the analyst from several sources, depending on the
quality of the required information, such as financial statements or personal information
about the customer, each according to its sources.
30
Method and tool of appropriate analysis:
There are many methods and tools used in the analysis, for example, current ratio and the
quick ratio and cash turnover and inventory turnover and leverage in addition to the
statements of cash flows during successive time intervals.
Use of information and metrics accruing to the analyst to make the decision or
requested action:
This step is the hardest and most important in the financial analysis process, and you need
to use a large amount of mental work, wisdom, skill and effort to assess what is behind the
numbers. This cannot replace the effort by mechanical operation, but the correct definition
of the problem, and the appropriate selection of the questions, and skill in choosing the
appropriate analytical tools will lead to a reasonable explanation for the result of the
analysis.
Aql sees that the financial analysis methodology includes stand on the following: (Aql,
2000, p 288)
- Selection of the appropriate standard for measuring results.
- Determining the deviation from the standard measured to determine the importance of
the deviation in absolute and relative numbers.
- Analysis of the reasons for the deviation and identified.
- Develop appropriate recommendation on the results of the analysis in the report, which is
by the analyst at the end of the analysis process.
31
Steps of Financial Analysis:
Financial analysis require three major steps in order to make the financial statements,
which have been analyzed, fit the requirements analysis, where they are rearranging the
financial statements and classified in homogeneous accounting groups by which can
facilitate the process of analysis as follows: (Mursi and Allhalh, 2006, p 101)
- Category: This step is intended to put the data in consistent and similar groups that
enable to make comparisons.
- Comparison: In this step we create relationships between classified data according to
specific and standardized models and with the knowledge that the comparison is in groups’
level, total or partial, and between varying periods of time.
- Conclusion: This step includes the interpretation of relations that have been obtained in
the previous phase, in order to stand on the safety of the prevailing fiscal policies and the
financial position of the entity, and available development opportunities.
Financial analysis standards and their uses:
It is known that the calculation of financial ratios in isolation from a standard to measure
performance and to compare the results it would not be useful in the detection of
deviations and to judge the safety and adequacy ratios extracted in a financial analyst for
example, calculates the liquidity ratio, which is a quotient of current assets to current
liabilities, and exit in this case by 1:3, it does not make sense at all if the analyst could not
decide whether this ratio is high or low or unsatisfactory, and such a decision needs to
scale or a specific standard.
Hence the importance of the choice of criteria emerged in the financial analysis, which is a
specific number used as a benchmark for judging the suitability of proportion or number
(Aql, 2006, p 242), and in all cases should be available in the criteria the most important
characteristics: (Assar & others, 2001, p 156).
- That is the criteria characterized by relative stability meaning that remains constant does
not change from one period to another.
32
- To be a clear standard and is characterized by simplicity and ease of use that does not
have more than one interpretation.
- Be realistic standard and can be implemented.
Thus, the use of these standards will be useful in comparison with the actual percentages
that appear in the facilities which enable the analyst to detect deviations and the search for
its causes, in addition to the interpretation of the results and figures resulting from the
analysis process.
Terms of the financial analysis:
Should be available in the financial analysis of certain conditions to become a model and
then relied upon in the decision-making process, and these conditions are as follows: (Syah
and Ameri, 2006, p 50).
- Flexibility which susceptibility to change from time to time to conform with the
requirements of the change occurring during the period.
- Comprehensive sense to have a comprehensive financial analysis of the activities of the
facility so that it appears the various indicators on the activities of the facility, that does not
prevent the financial analysis is partly if necessary, to take a particular decision in a
particular activity.
- Take into account the principle of information economics in the sense that the financial
analysis in the economic cost and effort as well as in time.
- Is based on the prediction in the sense that the focus of financial analysis to predict the
future and not on the basis of the study of the historical circumstances of the facility, and
this prediction either short-term or long-term, such as the preparation of a financing plan
for the coming years and the study of or expectations of future cash flows during the next
periods, and so on for profit expected also.
- A speed that characterized the financial analysis in terms of achievement so as not to
make the data or information is obsolete in terms of time.
33
- The effectiveness and objectivity of financial analysis in the sense that the tool to be used
in an effective and objective analysis and modern in order to reach a realistic results and
accurate.
The beneficiaries of the financial analysis:
The financial analysis of the most important areas of knowledge that illuminate the road in
front of every variety of denominations used for the financial statements and interested
enterprises - private and public - and therefore, there are several categories benefit from
the financial analysis (Hassani, 1995, p 19).
There are various parties benefiting from the financial analysis information as varied
purposes of their use of such information, according to the diversity of their relationship
with the facility on the one hand, and the diversity of their decisions based on this
information the other hand, can be identified beneficiary groups of financial analysis
information is as follows: (Matar, 2003, p 5)
First: the internal parties
There are several parties from within the facility need to financial analysis, either to assess
their work or assess the work of the entity as a whole can we quote as follows:
Management:
Care management of the business at all levels of administrative financial analysis in order
to measure efficiency and to identify the weaknesses and shortcomings in their activities
during the financial period or period of financial analysis, and through the study of trends
and indicators of development percentage, or through the creation of logical relationships
that have significance and meaning among the terms or paragraphs of business results
statement (income) or the statement of financial position (balance sheet) or both together,
using economic indicators quantitative and qualitative.
34
The financial management as one of the key departments in the business, the interest in
financial analysis aims to maintain the integrity of the financial position of any interest in
the necessary liquidity to meet its current obligations in due dates, in addition to seeking to
maximize profits in the long term. The public entity seeks to maximize social returns in the
short term and long term.
The facility staff:
The staff is the most important stakeholders involved in the facility include shareholders
and workers, it is known that one of the most important objectives of the Department is to
satisfy its employees, and this is done through informing them of the fact that the financial
situation of the facility and put the cash and the level of profitability and efficiency of its
activities and the effectiveness of its policies and decisions, and other aspects of force,
which is strongly supportive of growth and continuity of the facility, thereby enhancing the
link workers and reduces labor turnover rate (Zubaidi, 2000, p 52), As well as workers
interested in the facility and it’s work results for two major reasons: (Mind, 2000, p 284)
- Enhance the feeling of membership and a sense of accomplishment in the case of success,
which affect the level of productivity.
- Their knowledge of the actual results will enable them to identify the reasonable limit to
their demands, to remain within the appropriate economic conditions of the facility.
Contributors:
The most important for shareholder is the return (profit) on the money invested, and the
degree of risk that can be exposed his investments. So he always spared no effort in the
search whether it is better to keep the shares owned or abandon them, so it the financial
analysis benefit the contributor in the evaluation of these aspects.
External parties:
Since there are many parties benefit from the financial analysis within the enterprise, there
is many other parties benefit from the financial analysis process from outside the facility
can be mentioned as follows:
35
Securities Dealers:
Aims these brokers from financial analysis to identify the following: (Aql, 2000, p 283)
- Changes that can occur on stock prices as a result of financial developments in the entity
or as a result of general economic conditions, which helps to take appropriate pricing
decisions for this stock.
- Shares of companies that can be a good investment opportunities can be exploited or
advise about these shares to customers.
Current and Prospective investors:
Interested investor financial analysis to identify the safety of his money and get a
reasonable profit in the long term, so concentrated interests of investors in the integrity of
the financial position of the company and its ability to achieve profits in proper different
time, it is natural to be interest in the profits generated by the company and the amount to
be distributed, including the owners, Even pleased with the investor for the company's
profits should be similar to companies profits that facing the same degree of risk and this is
achieved by financial analysis through comparison between corporate profits in the same
industry. (Rugby, 1998, p 13)
Government departments:
Government entities concern about analyze the performance of institutions for regulatory
reasons primarily, but secondly tax reasons, in addition to the following objectives: (Aql,
2006, p 2)
- Ensure compliance with applicable laws and regulations.
- Evaluation of performance as control of the central bank to commercial banks.
- Price controls.
- For statistical purposes.
36
Creditors:
Means the creditor person who underwritten in the special bond in the facility or the
person likely buy the bonds issued, or underwriting the new loan or the process of lending
money for the facility, which may be a creditor bank or financial entity or natural person, so
they are interested in general identify the possibility of an entity to meet loans when it
comes to maturity. If the loan is for more than a year, usually interesting creditor about the
possibility of repayment of this long-term commitment, but if the loan is for a period of less
than a year, so the attention of the creditor is to ensure the possibility of repayment of the
debtor these obligations in the short term, however he cares financial balance in the long
term. (Hanafi & Qryaks, 2002, p 231)
Manufacturer:
Cares supplier to ensure the integrity of the financial position of the dealers with him, and
the stability of their conditions of Finance, and this means studying and analyzing the
indebtedness of dealers in the books of supplier and the evolution of this indebtedness, and
in the light of the analytical results for the accounts of customers decide supplier whether it
will continue to deal with them or to cut this dealing or abolish it, and thus benefit the
supplier from information and data which provided and published periodically by dealers.
(Al-Zubaidi, 2000, p 51)
Determinants of financial analysis:
Despite the importance of financial analysis and its ability to help identify the center of the
facility and the efficiency of different operations of the entity and the investment capacity
but there are many determinants of financial analysis which the analyst make the
necessary efforts to overcome them is the following (www.sca.ae) :
-Focus the analyst's attention on one side of the financial situation of the entity.
-Degree of an analysts concern about the entity and the depth of analysis required.
-The quantity and quality of available information with a direct impact on the outcome of
the analysis.
37
-The entry of some subjective judgments in the preparation of financial statements, such as
the provisions relating to consumption and evaluation of goods and reserves for doubtful
debts.
-The continuity of the use of methods and accounting rules as to change the methods will
lead to a change in the results.
-Abbreviation of the financial data in the financial statements, which limits the ability of the
external analyst on the exact conclusion.
-Location and type of company.
-Do not show the financial statements of management activities and expansion plans and
relations with suppliers and lenders.
Recent trends in the financial analysis:
Recently analysts adopts approach in the study of the financial situation of companies
differ in substance from the traditional approach. Called this approach Qualitative
Approach Analysis and in accordance to this approach is no longer interesting of financial
analyst confined only to quantitative content of book numbers shown by the published
financial statements But beyond his attention to the search for what behind those numbers
of indications is in a set of specific features of the profitability of the entity and its financial
position.
For example, in terms of profitability is no longer just a high number that appears by the
net profit in the income statement evidence convinces financial analyst that the
performance of the entity is moving in the right direction, but must to confirm this
conviction, the availability of other factors give this figure the meaning and significance
correct, are these factors in the search about persuasive answers to a set of questions
financial analyst must be accessed through a critical study carried out by a succession of
historical financial statements of an entity, as well as the historical financial statements to
the industry that they operate the facility. These questions include the following: (Matar,
2003, p 411)
38
- Is available for entity profits the continuity recipe or this height for a given year was
temporary or emergency.
- Is the general direction of the net profit for the facility characterized as stability or is it the
opposite sometimes fluctuates to rise and sudden fall other times.
- Are the principles and concepts, as well as accounting methods designated by the
management of the enterprise in the measurement of profit in line with the principles or
generally accepted accounting standards, or there is a clear and significant departure from
those principles and standards.
The future outlook for the financial analysis:
Based on the above it is clear that attention currently to the subject of financial analysis has
begun growing significantly, where there is appear specialized groups for the purpose of
financial analysis provided financial advisory services to clients in the financial markets, it
is no longer acceptable at the moment to be treated in the financial markets in a
speculation manner and the random motion and rely on rumors after he gave evidence on
the ability of specialists in these markets on the use of advanced scientific methods in this
area. (Rugby, 1998, p 9)
39
Chapter Three
Financial ratios used in financial analysis
to predict the stock price
40
The first section
Stock and factors affecting it’s prices
Introduction:
The stock of the most securities commonly traded in the market and there are many types
of stocks, but what concerns us in this study are ordinary shares, which are shares source
of long-term financing, which is a stake in the entity that gives the holder the right to obtain
a profit in the case of achieving entity profits, and thus the share price rises whenever got a
bigger distributions of profits.
So this is intended to Study to identify the concept and the factors affecting stock in the stock
price and financial ratios which they can predict the price of the share, but the goal is to discuss
the following topics:
Concept and definition of the stock.
Factors affecting the share price.
Methods of determining stock prices.
Types of prices announced by the stock exchange.
Financial ratios used to predict the price of share.
41
Concept and definition of the stock:
Constitute stock capital subscribed by the investors, which includes financial contributions and
determines the ownership of the company, and therefore, both the capital advertiser and capital
actual equity capital in it, all terms reflect the total value of the shares acquired by investors
(Kakamola, 2003, p 92).
And therefore cannot conceive the establishment of a joint stock company without the issuance
of shares, may be limited to shares in some companies on the ordinary shares, and then the
ordinary shares is a tool that should be met to provide funding for joint-stock companies, and
therefore the tool most commonly used in trading financial markets (Khalaf, 2006, p 200).
The stock gives the holder the right or share in the ownership of the company and this share is
determined by the number of stock owned by the number of stock Source (Alzerra and Farah,
2000, p 155)
From the above, it’s clear that there are several characteristics of shares, including:
- The stock is share in the capital of entity.
- Viability of stock trading.
- The limited liability granted to the holder of the stock by its share capital or stock.
- Equal to the value of the stock for the entity itself.
42
Factors affecting the share price:
The study of the movement of stock prices and the volatility of prices is important in the world
of finance and investment, and tries to many researchers since the last century to identify the
factors influencing the share price, which is behind the change in the price of him, and try to
examine these factors and interpretation in order to benefit them in the knowledge of their impact
on the share price, as investors cares so much the price per share, because the price of the stock
is on the impact of the process of buying or selling, There are many factors that can affect the
share price in the market is varying in terms of its power and influence from one factor to
another and the factors affecting the stock price in the financial market as follows:

Book value per share:
Book value affected on the share price significantly, where there is often a direct correlation
between the book value of the share and share price in the market, that is, increase the values per
share amounts associated with an increased share price, and vice versa so the low book value per
share associated with lower price in the market (khalaf, 2006, p 20).

Profits earned:
Of the underlying determinants of stock price is profitability of entity, so it is advisable financial
analyst buy stocks that are expected to increase profits of as he is advised to sell the stock, which
is expected direction of its profits to decline, although it may be seen in the short term there is no
link or a direct relationship between the share price and profitability Onsite, prices have headed
in the reverse direction to profit or may increase by small compared to the increase in profit.
 Dividend at the end of each year:
The increase in the cash dividend distributed on the stock from time to time is good news for the
investor, on the contrary, is a decline in the cash dividend is bad news for him, and there are
indications that the higher the proportion of profits paid whenever led to an increase in the
expected returns of the arrow, the reason for this is that if the company announced a high
proportion of the profits of cash distributed kilometers a pointed to the outlook for the company's
ability to maintain this high percentage is followed by an increase in the share price, and on the
contrary, the returns low-linked rates dividend low cash. (The Arab Society of Certified Public
Accountants, 2001, p 268)
43

General economic conditions of the country:
Of the economic situation the country's public and represented by the state of economic activity
represented by the output and national income, as the expansion and economic recovery that
accompanies the growth in the economy leads to increased demand for the stock and increased
its price in the market as a result, while the recession and the economic downturn include
reducing economic activities which in turn leads to lower demand for the stock, and thus reduce
the price in the market (khalaf, 2006, p 208).
Methods of determining stock prices:
Several ways to determine the share price as is the case in the global stock markets as follows:
(Barwari, 2002, p 7):
Roll-call pricing: Where he will meet intermediaries in the side of the stock market and
cheerleaders the highest voices presentations and applications in their possession, using hand
signals in addition to the call, by placing the forearm horizontally in the direction of the body at
the time of purchase and vertically at the sale.
Pricing inclusion: Under this method is the distribution of the various stock intermediaries who
have experience and specialization in some stocks, as each stock commands gathered in the
drawers of a specialist who determines the price, according to a method similar to the roll-call
pricing.
Pricing by objection or comparison: Under this method is recorded in a special register for
each sheet of various financial Sell or purchase orders, the sum of these facilities lead to the
identification of the amount required to sell or buy securities, and the limits of prices offered
through a specialist broker.
Pricing by Fund: This method is used in the event that offers sales and purchase orders in the
stock market are many and varied, depends intermediaries in this case, to put their offerings and
their applications in a special fund, and then the Stock exchange committee set prices by
calculating the rate of those offers and requests.
44
Pricing by percentage: Under this method, prices appear on the pricing schedule as a percentage
of the nominal share value discounted of which the value of part voucher known since the last
deduction.
Pricing by matching: When in one of the mediators received two opposite sides, one on the
selling and the other on buying the same quantity, buys intermediary from the first to the second
account. It is a method banned in many financial markets, only after making sure the mediator by
one of the brokers of that there is no supply or demand more convenient.
Types of prices announced by the stock exchange:
It is well known in the financial markets have ordered the sale or purchase issued by the client to
the broker in writing, and there is no reason why to be orally for easy handling, and includes the
order issued from the client amount they wish to buy or sell, and the price which accepts the deal
by a specific one of the following methods: (Hanafi, 2007, p 376)
Price selected: It puts the customer a minimum selling price and an upper limit in the case of
purchase so that it is not permissible for a broker selling for less than this limit or purchase
higher than this limit shall not delay the pretext of the hope for a better price, but was responsible
in the case of low prices.
Best price: According to this price may require that the client be to buy or sell at the best price
means that trying to broker sales best purchase price or the lowest price you can get.
Opening and closing price: The client may specify also practical implementation at Open any
price offered in the first session may also determine the price of any other closing price at the
end of the session and see (Barwari, 2002, p 77).
From the above illustrated clearly that there are many factors have an impact on the share
price in the financial market, whether its relevant work entity specifically or About policy
of distribution of profits or the status of the facility in terms of reputation or future or the
situation of the financial market and cash, which is determined by the share price of which,
or the situation General of the state's economy, which in turn affect the share price.
45
The second section
Financial ratios used to predict the share price:
Introduction:
This section deals with the concept of financial ratios and discusses how to use them in
practice through applied in the analysis of facilities business and evaluate their results,
therefore will be to discuss the following:
The concept of financial ratios ·
Financial Ratios goals ·
Importance of financial ratios ·
Financial Ratios selection ·
Applications ratios (liquidity ratios - Profitability ratios ...... etc.)
The concept of financial ratios:
Although the financial ratios have appeared and have been used from more than a century,
but it represents one of the tools of financial analysis that are relied upon by investors,
creditors, banks and others in making investment decisions.
This is a result of the development in the financial ratios in terms of composition and
method of use, the need of it increased by beneficiaries.(Turki, 1995, p 129), Financial
ratios considered the most important tools of financial analysis as mentioned above to
measure the financial performance of the facility and make comparisons for several years,
which in turn depends on the financial statements to predict the income of the entity and
profits intended for distribution in the future.
46
The analysis of financial ratios for the facility is the first step in the financial analysis is sure
that the shareholders are one of the main parties benefiting from the analysis of the
financial ratios that are interested to know the company's efficiency and profitability and
debt ratios, Therefore it is important to determine the return on investment in the shares
of the entity, Whenever the productive efficiency of the company has increased its
profitability and then increase dividends to shareholders, in turn, is reflected to improve its
share price in the market, and thus becomes a return on investment in its shares higher.
Therefore contributors cares about analyze the financial position of an entity to determine
the attractiveness of investing in shares. (Alzerri and Farah, 2001, p 207)
Objectives of Financial Ratios:
The financial analysis method "by ratios" and using the financial statements the most
common methods used in financial analysis and aims to use the following: (Abu Shaban,
1992, p 4)
- Understand the data contained in the financial statements in order to assist management
in making different decisions. Where financial indicators resulting from the financial
analysis reveals the strengths and deficiencies in the financial center of the facility, and also
can use it in examine the previous achievements, and thus the extent of its commitment to
fiscal policies.
- Reduction of the large size of the financial information to the small number and useful
financial indicators.
The importance of financial ratios:
Interested in the majority of facilities and finance departments and investing activities
offices and legal accountant of financial ratios as one of the tools for measuring
performance and financial conditions of the facilities at some time or during the financial
year. And return those to the importance of the following (Najjar 2002, p 31):
- Easy to calculate financial ratios.
- For being a quantitative measures to judge the internal units.
47
- Financial ratios provide basic indicators to judge the performance without the need to
provide some financial details.
Select Financial Ratios:
When analyzing the financial statements of an entity that can use a large number of
financial ratios which can be divided into several groups and each group of these ratios
measure and examine a particular phenomenon depending on the intended purpose of the
financial analysis for example, the owners of short-term debt are focusing on the study of
certain ratios differ from the percentages focus and studied by the owners of long-term
debt, Also, the types of financial data available to determine the nature of the financial
analysis and the nature of the financial ratios. Internal financial analyst has data that
different in quality and quantity from that are available for external analyst (Assar et al,
2001, p 190).
Therefore, financial ratios is based on idea of selection, comparison and interpretation of
interrelations between the group financial statements (balance sheet and income
statement) which is the beginning of a series of in-depth financial analysis and not last as
doing by a financial analyst.
1- Liquidity ratios:
It is these ratios that measure or aims to analyzing and evaluating the working capital and
to identify the degree of facility liquidity in the short term, and the relative importance of
the elements of the most liquid assets which expresses the possibility of an entity to pay
current liabilities by duration of less than one year (Al Shabib, 2006, p 60 ). Since these
obligations are paid in cash or cash equivalents for that institution must retain sufficient
amounts of these assets (which are easily converted to cash) superiority and increase the
amount of current liabilities and reflect the following percentage of liquid assets of the
project (Saaydh and Freed, 2004, p 134).

Current Ratio
Is the ratio which measures the extent of an entity's ability to repay its short-term
obligations and reflect the size of short-term obligations and the extent of the entity's
ability to repay and is expressed by the following equation:
48
Current assets
Current Ratio =
Current liabilities
Current Ratio has accepted as a general measure because it provides the best single
indicator of the coverage of liabilities to assets expected to be converted into cash at a date
coincides with the date of payment of current liabilities (Aql, 2000, p 190).
2- Profitability ratios:
Are ratios that measure as a result of the project and the efficiency of investment policies
and decisions taken in senior management (Al Shabib, 2006, p 76). also these ratios
measure the entity's ability to generate profits in the light of a certain level of sales or
assets or equity or value of the stock, as the profits and the ability to generate it is
important to bring the heads of external funds for the facility, and when you compare these
ratios between facilities, this may indicate the ability of certain facilities to generate high
levels of profits and thus capital directed toward him (The Arab Society of Certified Public
Accountants, 2001, p 178). It is also a measure of the profitability ratios operational
efficiency of the entity where the profitability is the end result of a number of policies and
decisions taken by the Chief Financial Officer (Abbas, 2002, p 75).

Return on assets ratio
This percentage is measured by following relationship:
Rate of return on total assets =
Net profit after tax
Total assets
This ratio refers to the efficiency in the use of funds to assets regardless of the lack of these
funds where it's a reflection of the efficiency of the financial resources invested in the
entity to achieve net profit (Kengo, 1997, p 93).

Rate of return on equity
This ratio is calculated by dividing the net profit after tax on the total equity and measures
the return on total investments of shareholders according to the following equation:
49
Rate of return on equity =
Net profit after tax
Equity

Profit to sales ratio (profit margin)
This ratio shows the ability of entity to make a profit as a result of sales is calculated by
dividing net profit after interest and taxes on sales according to the following equation:
Net profit after interest and taxes
Profit margin =
Sales
3- Debt ratios:
Generally debt ratios focused to measure the ability of entity to serve the long-term debt
and repaid when the deadline due, also when the maturity date comes of that debt, the
property must be able to repay those debts either from its own funds (equity) or borrowing
again , There is no doubt that the ability of the entity to obtain or to repay long-term debt
that often dependent or related to the entity's ability to obtain capital from shareholders,
hence the relationship between the rights of shareholders and creditors' rights must be
clarified and evaluated together (Lutfi, 2005, p 348).
This kind of ratios gives accurate indicators about the financial situation of the facility in
the long term, it turns out entity's ability to repay its debts and long-term obligations such
as bonds and long-term loans and, therefore, indicate the amount of the contribution of
debt to capital.
And debt ratios can be calculated based on the data contained in the budget and then called
financial leverage ratios, or by relying on the statement of income data and then called the
coverage rates (Karajeh & others, 2002, p 190).
50

The ratio of debt to equity (shareholders) and also called by borrowing to the
right of ownership.
This ratio measure the entity obligations towards its creditors and its relationship with
funds provided by the owners and intended to borrowing is current liabilities, medium and
long term, and the property funds are capital and reserves and profits reserved, and
reflects lower this ratio for better protection for creditors and for having the potential to
borrow from the facility, and some believe that the maximum for this ratio in the industrial
field are 1:1 or 100%. According to the following equation:
Total debt (short and long term)
Debt Ratio =
Equity

The ratio of current liabilities to equity
This ratio measures the efficiency of the money, which is the right of ownership compared
with current obligations to the project, and thus shows us this percentage relationship
between the size of the funds provided by the owners compared to funds obtained by the
project of short-term loans, And that the lower this ratio means that the amount of money
contributed by the owners of the project is sufficient and able to meet current liabilities,
the equity is the source of long-term financing of the project on the use of short-term loans
to finance its current activities of different This is calculated by dividing current liabilities
on the right of property in accordance with to the following equation:
Current liabilities
The ratio of current liabilities to equity =
Equity
51
4- Activity ratios:
Activity ratios measure the efficiency and effectiveness of the management of the facility in
asset management and the exploitation of its resources, and activity ratios are also known
as recycling ratios because it shows the speed at which the turn or rotate of assets to sales
(Khan and Gharaibeh, 1995, p 62). Where it can be through this ratio address shortcomings
resulting from the use of liquidity ratios by the adoption of current accounts as a basis of
measurement, while the changes that occur in these accounts may have a significant impact
on the real liquidity of facility Hence, we find that the proportions of activity concerned
with a rate of rotation, it starts cash and ends cash. (Dowri and zanad, 2003, p 76)

Total assets turnover
Total assets turnover indicates to the effectiveness of the facility use for its assets in
generating sales and the greater of the total assets turnover, means more effective use of
assets. This measure has great importance for the management of the facility because it
gives an indication of the financial viability of the facility operations. It is calculated as
follows:
Net sales
Total assets turnover =
Total assets

Current assets turnover
This rate measures the extent of management efficiency in the exploitation of current
assets to generate sales or measures the ability of one dollar invested in current assets to
generate sales and this ratio is calculated by the following equation:
Current assets turnover =
Net sales
Total current assets
52

Fixed Asset Turnover
Measures the average number of times the use of fixed assets, where they are measuring
the rate of investment funds installations in fixed assets, and comparing the number of
times the sessions of fixed assets in previous years and the rates of facilities similar activity
is unclear how much use the facility for its fixed assets, no doubt to increase this rate
means the intensity of use of the facility fixed assets, which requires the need to increase
investment in fixed assets, and the low turnover rate means that there is an increase in
undesirable investment in fixed assets.
Net sales
Fixed Asset Turnover =
Total fixed assets
5- Market ratios (stock)
Is a set of financial ratios shows the share price relationship with profits and cash flow and
book value per share, as well as give a picture of the investors on the previous and
expected status of the company.

Profits per ordinary share ratio
This is calculated by dividing the net profit after interest and tax to the profit available to
the owners on the number of ordinary shares in issue, according to the following formula:
The ratio of profit per ordinary share =
Net profit after interest and tax
Number of ordinary shares
53
The result is consider important financial indicator, reflecting the form of management
performance practiced by the facility to cover its position in the market, Increasing the
ratio should give management an important role for investors and shareholders, and gives
the right to the financial analyst to emphasize that the entity enjoys the status of a force
within the market while indicating decline to performance degradation and therefore,
cases of weakness, which reflected the same in the financial market (Al-Zubaidi, 2000, p
228)

Market value to book value
This is calculated by dividing the share price in the stock market to book value per share
and reflects the value of the "time" If the value of the index is greater than one, this means
that the company is performing well, according to assessment of investors in the financial
markets and that this was reflected higher price of share in the market above the book
value of the shares, And is calculated by the following equation:
the ordinary share price in the market
Market value to book value =
Book value of ordinary share

The ratio of stock price to earnings per share
This ratio shows the price at which the investor is willing to pay for what every dollar of
profits accomplish, and reflects on the outcome of this ratio a number of times, For
example, if the ratio of share price to its share of the profits equal to 5 times, it means that
the stock market sold five times of earnings per share. This ratio will be high in the highgrowth enterprises, while it is low in high-risk facilities.
Share price to earnings per share =
the ordinary share price in the market
Earnings per share achieved
54

Book value per ordinary share
This ratio measures the extent of growth in shareholders' equity, the higher the value it
was evidence of the efficiency of the facility's performance and therefore considers
important indicators of investment decision-makers in the stock, calculated by the
following equation:
Equity of ordinary shares
Book value per ordinary share =
Number of ordinary shares
55
Chapter Four
The role of the financial analysis of published financial
information in the financial statements to predict the
prices of shares
“Applied Study”
56
Introduction:
The aim of this chapter is to analyze and discuss the practical aspects of this study in order
to identify the role of financial analysis of published financial information in the financial
statements for predicting stock prices and to achieve it aims of this chapter are discussed
through two sections as follows:
The first Section: the methodology of the study.
The second Section: the results of the analysis and interpretation.
57
The first section
Study Methodology
Introduction:
This part of the study presented to the methodology of the study, and includes the study
population, and appointed, and statements and actions and used financial ratios and the
used statistical method to predict the price per share is as follows:
To achieve the objectives of the study have been the use of descriptive analytical method to
study the variables that contribute to predict stock price, and then use the analytical
method in practical application and conduct the necessary tests. Two methods were used
to collect the data as follows:
The theoretical study:
Which depend on:
- Reference books that dealt with the subject of the study.
- Publications of the Palestine Securities Exchange.
- Reports issued by the facilities that have been selected as a sample for the study.
- Master messages relevant to the subject of the study.
- Internet and materials on the web pages.
58
Applied Study
Test of 13 financial ratios to a sample of 10 facilities listed its shares on the Palestinian
fiscal market for the period between year 2010-2012, depending on the data of balance
sheet and profit and loss account.
The study population:
The study population consists of all establishments listed on the Palestine Securities
Exchange, consisting of five sectors, and their number (35) facilities classified until the end
of 2012 as in the following table:
Table (1)
Distribution of the study population on Palestine Securities Exchange market facilities
The economic sector name
The number of facilities
The number of establishments
in the sample
The insurance sector
4 facilities
2
Banking Sector
6 facilities
2
Services sector
7 facilities
2
Investment sector
8 facilities
2
Industry Sector
10 facilities
2
5 economic sectors
35 facilities, the total
population of the study
10 facilities total study sample
59
The study sample:
Stratified sample was selected from the study population, two establishments from each
sector and having two conditions are as follows:
- Provides all the financial statements.
- That has been included in the market.
Steps of the study:
A - The financial statements have been collected for facilities included in the study sample
(the balance sheet and profit and loss) for the period between (2010-2012) and from the
company itself or through its website
B - Was obtained on the closing price for each facility through annual time series consisting
of 3 years for each facility through the annual trading bulletins posted on the Palestine
Securities Exchange.
C - Rely on (13) financial ratio of the financial statements of the facilities to be used in the
financial analysis process and to identify the extent of their impact in predicting the price
of the stock.
These ratios are:
-Current Ratio
- Rate of return on total assets ratio
-Rate of return on equity ratio
-Profit to sales ratio (profit margin)
60
-Debt Ratio
-The ratio of liabilities to equity
- Total assets turnover ratio
- Current assets turnover ratio
- Fixed assets turnover ratio
-The ratio of profit per ordinary share
-The ratio of market value to book value
-The ratio of stock price to earnings per share
-Book value per ordinary share
D-Find the correlation between these ratios and the share price in the stock market.
61
The Second topic
The results of the statistical analysis of hypotheses
Introduction:
In this section are presented the results of the analysis of the financial statements of the
facilities under study in order to determine the extent of correlation between the
dependent variable (share price) and the independent variables (financial ratios) and their
impact in predicting the price per share has been accepted or rejected the hypothesis
according to the value of Sig.
62
First: the insurance sector
Al Ahlia Insurance Group and the National Insurance Company
Determine the correlation coefficients and hypothesis testing
Has been selected (8) of this sector variables to measure the contribution to predict stock
price, where the value was calculated rates of these variables at 0.05 level of significance,
then was calculated coefficient of correlation between the statistical variable of each of the
independent variables and the results were as shown in Table 2.
Table (2)
Correlation coefficients between the dependent variable and the independent variables
Independent variables
Coefficient of
correlation (r)
% (r2)
Correlation
Value (sig.)
Current Ratio
-0.094
0.89
0.346
Return on assets ratio
0.691
47.70
0.0
Return on equity ratio
0.689
47.51
0.0
the ratio of current
liabilities to equity
-0.221
4.89
0.174
Earnings Per Share (EPS)
0.695
48.24
0.0
ratio of market value to
book value
0.964
92.90
0.0
the ratio of share price to
dividends earned
0.126
1.58
0.299
ratio of book value per
ordinary share
0.185
3.40
0.218
*correlation at the 0.05 level of significance
63
By comparing between the variables that have been identified for this sector and between
the actual results of the correlation coefficients that show the real relationship between the
dependent variable and the independent variables to verify the validity of hypotheses for
the sector mentioned in the light of the results shown by the above table shows the
following:
Hypothesis No. 1
H0 : There is no statistically significant relationship between Current Ratio and prediction
of the price per share in the stock market.
H1 : There is statistically significant relationship between Current Ratio and prediction of
the price per share in the stock market.
The results showed that the correlation coefficient between the two variables was (-0.094)
and the value of Sig. = 0.346 which is greater than the significance level of 0.05, which
means accepting the null hypothesis and therefore there is no statistically significant
relationship between Current Ratio and share price in the stock market (for this sector).
Hypothesis No. 2
H0 : There is no statistically significant relationship between the rate of return on assets
and predict the stock price in the stock market.
H1 : there statistically significant relationship between the rate of return on assets and
predict the stock price in the stock market.
The results showed that the correlation coefficient between the two variables was (0.691)
and the value of sig= 0.000 less than the significance level 0.05, which means rejection of
the null hypothesis and therefore it is there direct correlation with statistical significance
between the rate of return on assets and the share price in the stock market.
64
Hypothesis No. 3
H0 : There is no statistically significant relationship between the rate of return on equity
and share price prediction in the stock market.
H1 : there statistically significant relationship between the rate of return on equity and
share price prediction in the stock market.
The results showed that the correlation coefficient between the two variables was (0.689)
and the value of sig= 0.000 which is less than the significance level of 0.05, which means
rejection of null hypothesis and therefore it, is there direct correlation with statistical
significance between the rate of return on equity and the share price in the stock market.
Hypothesis No. 4
H0 : There is no statistically significant relationship between the rate of current liabilities
to equity and share price prediction in the stock market.
H1 : there statistically significant relationship between the rate of current liabilities to
equity and share price prediction in the stock market.
The results showed that the correlation coefficient between the two variables was (-0.221)
and the value of sig= 0.174 which is greater than the significance level 0.05, which means
accepting the null hypothesis and therefore there is no statistically significant relationship
between the proportion of current liabilities to equity and the share price in the stock
market.
Hypothesis No. 5
H0 : There is no statistically significant relationship between Earnings Per Share and share
price prediction in the stock market.
H1 : There statistically significant relationship between Earnings Per Share and share price
prediction in the stock market.
65
The results showed that the correlation coefficient between the two variables was (0.695)
and the value of sig= 0.000 which is less than the significance level 0.05, which means
rejection of null hypothesis and therefore it is there direct correlation statistically
significant between the percentage of earnings per share of the profits and share price in
the stock market.
Hypothesis No. 6
H0 : There is no statistically significant relationship between ratio of market value to book
value and share price prediction in the stock market.
H1 : There statistically significant relationship between ratio of market value to book value
and share price prediction in the stock market.
The results showed that the correlation coefficient between the two variables was (0.964)
and the value of sig= 0.000 which is less than the significance level 0.05, which means
rejection of null hypothesis and therefore it is there direct correlation statistically
significant between the percentage of market value to book value and share price in the
stock market.
Hypothesis No. 7
H0 : There is no statistically significant relationship between the ratio of share price to
dividends earned and share price prediction in the stock market.
H1 : There statistically significant relationship between the ratio of share price to dividends
earned and share price prediction in the stock market.
The results showed that the correlation coefficient between the two variables was (-0.126)
and the value of sig= 0.299 which is greater than the significance level 0.05, which means
accepting the null hypothesis and therefore there is no statistically significant relationship
between the percentage of share price to profits and share price in the stock market.
66
Hypothesis No. 8
H0 : There is no statistically significant relationship between the ratio of book value per
ordinary share and share price prediction in the stock market.
H1 : There statistically significant relationship between the ratio of book value per ordinary
share earned and share price prediction in the stock market.
The results showed that the correlation coefficient between the two variables was (0.185)
and the value of sig= 0.218 which is greater than the significance level 0.05, which means
accepting the null hypothesis and therefore there is no statistically significant relationship
between the percentage of book value per ordinary share and the share price in the stock
market.
67
Second: the banking sector
Palestine Investment Bank and Quds Bank for Development and Investment
Determine the correlation coefficients and hypothesis testing
Has been selected (8) of this sector variables to measure the contribution to predict stock
price, where the value was calculated rates of these variables at0.05 level of significance,
then was calculated coefficient of correlation between the statistical variable of each of the
independent variables and the results were as shown in Table 3.
Table (3)
Correlation coefficients between the dependent variable and the independent variables of the
banking sector
Independent variables
Coefficient of
correlation (r)
% (r2)
Correlation
Value (sig.)
Current Ratio
-0.014
0.02
0.476
Return on assets ratio
0.217
4.73
0.178
Return on equity ratio
0.247
6.10
0.147
the ratio of current
liabilities to equity
-0.028
0.08
0.453
Earnings Per Share (EPS)
0.194
3.77
0.206
ratio of market value to
book value
0.967
93.60
0.0
the ratio of share price to
dividends earned
0.967
93.59
0.0
ratio of book value per
ordinary share
0.190
3.62
0.211
*correlation at the 0.05 level of significance
68
By comparing between the variables that have been identified for this sector and between
the actual results of the correlation coefficients that show the real relationship between the
dependent variable and the independent variables to verify the validity of hypotheses for
the sector mentioned in the light of the results shown by the above table shows the
following:
Hypothesis No. 1
H0 : There is no statistically significant relationship between Current Ratio and prediction
of the price per share in the stock market.
H1 : There is statistically significant relationship between Current Ratio and prediction of
the price per share in the stock market.
The results showed that the correlation coefficient between the two variables was (-0.014)
and the value of Sig. = 0.476 which is greater than the significance level of 0.05, which
means accepting the null hypothesis and therefore there is no statistically significant
relationship between Current Ratio and share price in the stock market (for this sector).
Hypothesis No. 2
H0 : There is no statistically significant relationship between the rate of return on assets
and predict the stock price in the stock market.
H1 : there statistically significant relationship between the rate of return on assets and
predict the stock price in the stock market.
The results showed that the correlation coefficient between the two variables was (0.217)
and the value of sig= 0.178 greater than the significance level 0.05, which means accepting
the null hypothesis and therefore there is no statistically significant relationship between
the rate of return on assets and the share price in the stock market.
69
Hypothesis No. 3
H0 : There is no statistically significant relationship between the rate of return on equity
and share price prediction in the stock market.
H1 : there statistically significant relationship between the rate of return on equity and
share price prediction in the stock market.
The results showed that the correlation coefficient between the two variables was (0.247)
and the value of sig= 0.147 which is greater than the significance level of 0.05, which means
accepting the null hypothesis and therefore there is no statistically significant relationship
between the rate of return on equity and the share price in the stock market.
Hypothesis No. 4
H0 : There is no statistically significant relationship between the rate of current liabilities
to equity and share price prediction in the stock market.
H1 : there statistically significant relationship between the rate of current liabilities to
equity and share price prediction in the stock market.
The results showed that the correlation coefficient between the two variables was (-0.028)
and the value of sig= 0.453 which is greater than the significance level 0.05, which means
accepting the null hypothesis and therefore there is no statistically significant relationship
between the proportion of current liabilities to equity and the share price in the stock
market.
Hypothesis No. 5
H0 : There is no statistically significant relationship between Earnings Per Share and share
price prediction in the stock market.
H1 : There statistically significant relationship between Earnings Per Share and share price
prediction in the stock market.
70
The results showed that the correlation coefficient between the two variables was (0.194)
and the value of sig= 0.206 which is greater than the significance level 0.05, which means
accepting of null hypothesis and therefore there is no statistically significant relationship
between the percentage of earnings per share of the profits and share price in the stock
market.
Hypothesis No. 6
H0 : There is no statistically significant relationship between ratio of market value to book
value and share price prediction in the stock market.
H1 : There statistically significant relationship between ratio of market value to book value
and share price prediction in the stock market.
The results showed that the correlation coefficient between the two variables was (0.967)
and the value of sig= 0.000 which is less than the significance level 0.05, which means
rejection of null hypothesis and therefore it is there direct correlation statistically
significant between the percentage of market value to book value and share price in the
stock market.
Hypothesis No. 7
H0 : There is no statistically significant relationship between the ratio of share price to
dividends earned and share price prediction in the stock market.
H1 : There statistically significant relationship between the ratio of share price to dividends
earned and share price prediction in the stock market.
The results showed that the correlation coefficient between the two variables was (0.967)
and the value of sig= 0.0 which is less than the significance level 0.05, which means
rejection of the null hypothesis and therefore there is statistically significant relationship
between the percentage of share price to profits and share price in the stock market.
71
Hypothesis No. 8
H0 : There is no statistically significant relationship between the ratio of book value per
ordinary share and share price prediction in the stock market.
H1 : There statistically significant relationship between the ratio of book value per ordinary
share earned and share price prediction in the stock market.
The results showed that the correlation coefficient between the two variables was (0.190)
and the value of sig= 0.211 which is greater than the significance level 0.05, which means
accepting the null hypothesis and therefore there is no statistically significant relationship
between the percentage of book value per ordinary share and the share price in the stock
market.
72
Third: the investment sector
Palestine Company for Property Investment and Palestine Development and
Investment Company
Determine the correlation coefficients and hypothesis testing
Has been selected (9) of this sector variables to measure the contribution to predict stock
price, where the value was calculated rates of these variables at the 0.05 level of
significance was calculated coefficient of correlation between the statistical variable of each
of the independent variables and the results were as shown in Table4.
Table (4)
Correlation coefficients between the dependent variable and the independent
variables
Independent variables
Coefficient of
correlation (r)
% (r2)
Correlation
Value (sig.)
Current Ratio
.778
60.59
0.0
Return on assets ratio
.482
23.28
.016
Return on equity ratio
.446
21.73
.019
The ratio of debt to equity
-.337
11.39
.073
the ratio of current
liabilities to equity
-.406
16.50
.038
Earnings Per Share (EPS)
.468
21.91
.019
ratio of market value to
book value
.983
96.67
0.0
the ratio of share price to
dividends earned
.150
2.24
.271
book value per ordinary
share
.475
22.60
.017
73
A comparison between the variables that have been identified for this sector and between
the actual results of the correlation coefficients that show the real relationship between the
dependent variable and the independent variables to verify the validity of hypotheses for
the sector mentioned in the light of the results shown by the above table shows the
following:
Hypothesis No. 1
H0 :There is no statistically significant relationship between Current Ratio and prediction
of the price per share in the stock market.
H1 : There is statistically significant relationship between Current Ratio and prediction of
the price per share in the stock market.
The results showed that the correlation coefficient between the two variables was (.778)
and the value of Sig. = 0.0 which is smaller than the significance level of 0.05, which means
rejecting the null hypothesis and therefore there is statistically significant relationship
between Current Ratio and share price in the stock market (for this sector).
Hypothesis No. 2
H0 :There is no statistically significant relationship between Return on assets ratio and
prediction of the price per share in the stock market.
H1 : There is statistically significant relationship between Return on assets ratio and
prediction of the price per share in the stock market.
The results showed that the correlation coefficient between the two variables was (.482)
and the value of Sig. = 0.016 which is smaller than the significance level of 0.05, which
means rejecting the null hypothesis and therefore there is statistically significant
relationship between Current Ratio and share price in the stock market (for this sector).
74
Hypothesis No. 3
H0 :There is no statistically significant relationship between Return on equity ratio and
prediction of the price per share in the stock market.
H1 : There is statistically significant relationship between Return on equity ratio and
prediction of the price per share in the stock market.
The results showed that the correlation coefficient between the two variables was (.466)
and the value of Sig. = 0.019 which is smaller than the significance level of 0.05, which
means rejecting the null hypothesis and therefore there is statistically significant
relationship between Current Ratio and share price in the stock market (for this sector).
Hypothesis No. 4
H0: There is no statistically significant relationship between the ratio of debt to equity and
prediction of the price per share in the stock market.
H1 : There is statistically significant relationship between the ratio of debt to equity and
prediction of the price per share in the stock market.
The results showed that the correlation coefficient between the two variables was (-0.337)
and the value of Sig. = 0.073 which is greater than the significance level of 0.05, which
means accepting the null hypothesis and therefore there is no statistically significant
relationship between Current Ratio and share price in the stock market (for this sector).
Hypothesis No. 5
H0 :There is no statistically significant relationship between the ratio of current liabilities
to equity and prediction of the price per share in the stock market.
H1 : There is statistically significant relationship between Return on equity ratio and
prediction of the price per share in the stock market.
75
The results showed that the correlation coefficient between the two variables was (-.406)
and the value of Sig. = .038 which is smaller than the significance level of 0.05, which means
rejecting the null hypothesis and therefore there is statistically significant relationship
between Current Ratio and share price in the stock market (for this sector).
Hypothesis No. 6
H0 :There is no statistically significant relationship between earnings Per Share (EPS) and
prediction of the price per share in the stock market.
H1 : There is statistically significant relationship between earnings Per Share (EPS) and
prediction of the price per share in the stock market.
The results showed that the correlation coefficient between the two variables was (.468)
and the value of Sig. = .019 which is smaller than the significance level of 0.05, which means
rejecting the null hypothesis and therefore there is statistically significant relationship
between Current Ratio and share price in the stock market (for this sector).
Hypothesis No. 7
H0: There is no statistically significant relationship between ratio of market value to book
value and prediction of the price per share in the stock market.
H1 : There is statistically significant relationship between ratio of market value to book
value and prediction of the price per share in the stock market.
The results showed that the correlation coefficient between the two variables was (.983)
and the value of Sig. = 0.0 which is smaller than the significance level of 0.05, which means
rejecting the null hypothesis and therefore there is statistically significant relationship
between Current Ratio and share price in the stock market (for this sector).
76
Hypothesis No. 8
H0 : There is no statistically significant relationship between the ratio of share price to
dividends earned and prediction of the price per share in the stock market.
H1 : There is statistically significant relationship between the ratio of share price to
dividends earned and prediction of the price per share in the stock market.
The results showed that the correlation coefficient between the two variables was (.150)
and the value of Sig. = 0.271 which is greater than the significance level of 0.05, which
means accepting the null hypothesis and therefore there is no statistically significant
relationship between Current Ratio and share price in the stock market (for this sector).
Hypothesis No. 9
H0 :There is no statistically significant relationship between book value per ordinary share
and prediction of the price per share in the stock market.
H1 : There is statistically significant relationship between book value per ordinary share
and prediction of the price per share in the stock market.
The results showed that the correlation coefficient between the two variables was (.475)
and the value of Sig. = 0.017 which is smaller than the significance level of 0.05, which
means rejecting the null hypothesis and therefore there is statistically significant
relationship between Current Ratio and share price in the stock market (for this sector).
77
Fourth: the services sector
Palestine Telecommunications Company (paltel) and Arab Real Estate Establishment
Determine the correlation coefficients and hypothesis testing
Has been selected (11) of this sector variables to measure the contribution to predict stock
price, where the value was calculated rates of these variables at the 0.05 level of
significance was calculated coefficient of correlation between the statistical variable of each
of the independent variables and the results were as shown in Table5.
Table (5)
Correlation coefficients between the dependent variable and the independent variables
Independent variables
Coefficient of
correlation (r)
% (r2)
Correlation
Value (sig.)
Current Ratio
-0. 322
10.40
0.083
Return on assets ratio
0.403
16.23
0.039
Return on equity ratio
0.393
15.42
0.043
the ratio of current liabilities
to equity
0.274
7.50
0.121
Earnings Per Share (EPS)
0.531
28.18
0.008
ratio of market value to book
value
0.858
73.53
0.000
the ratio of share price to
dividends earned
0.420
17.64
0.033
book value per ordinary
share
0.525
27.56
0.009
current assets turnover ratio
-.008
.01
0.487
fixed assets turnover ratio
-.455
20.71
0.022
Profit to sales ratio (profit
margin)
0.414
17.12
0.035
78
A comparison between the variables that have been identified for this sector and between
the actual results of the correlation coefficients that show the real relationship between the
dependent variable and the independent variables to verify the validity of hypotheses for
the sector mentioned in the light of the results shown by the above table shows the
following:
Hypothesis No. 1
H0 :There is no statistically significant relationship between Current Ratio and prediction
of the price per share in the stock market.
H1 : There is statistically significant relationship between Current Ratio and prediction of
the price per share in the stock market.
The results showed that the correlation coefficient between the two variables was (-.322)
and the value of Sig. = 0.083 which is greater than the significance level of 0.05, which
means accepting the null hypothesis and therefore there is statistically significant
relationship between Current Ratio and share price in the stock market (for this sector).
Hypothesis No. 2
H0 :There is no statistically significant relationship between Return on assets ratio and
prediction of the price per share in the stock market.
H1 : There is statistically significant relationship between Return on assets ratio and
prediction of the price per share in the stock market.
The results showed that the correlation coefficient between the two variables was (.403)
and the value of Sig. = 0.039 which is smaller than the significance level of 0.05, which
means rejecting the null hypothesis and therefore there is statistically significant
relationship between Current Ratio and share price in the stock market (for this sector).
79
Hypothesis No. 3
H0 :There is no statistically significant relationship between Return on equity ratio and
prediction of the price per share in the stock market.
H1 : There is statistically significant relationship between Return on equity ratio and
prediction of the price per share in the stock market.
The results showed that the correlation coefficient between the two variables was (.393)
and the value of Sig. = 0.043 which is smaller than the significance level of 0.05, which
means rejecting the null hypothesis and therefore there is statistically significant
relationship between Current Ratio and share price in the stock market (for this sector).
Hypothesis No. 4
H0 :There is no statistically significant relationship between the ratio of current liabilities
to equity and prediction of the price per share in the stock market.
H1 : There is statistically significant relationship between Return on equity ratio and
prediction of the price per share in the stock market.
The results showed that the correlation coefficient between the two variables was (.274)
and the value of Sig. = .121 which is greater than the significance level of 0.05, which means
accepting the null hypothesis and therefore there is statistically significant relationship
between Current Ratio and share price in the stock market (for this sector).
Hypothesis No. 5
H0 :There is no statistically significant relationship between earnings Per Share (EPS) and
prediction of the price per share in the stock market.
H1 : There is statistically significant relationship between earnings Per Share (EPS) and
prediction of the price per share in the stock market.
80
The results showed that the correlation coefficient between the two variables was (.531)
and the value of Sig. = .008 which is smaller than the significance level of 0.05, which means
rejecting the null hypothesis and therefore there is statistically significant relationship
between Current Ratio and share price in the stock market (for this sector).
Hypothesis No.6
H0 :There is no statistically significant relationship between ratio of market value to book
value and prediction of the price per share in the stock market.
H1 : There is statistically significant relationship between ratio of market value to book
value and prediction of the price per share in the stock market.
The results showed that the correlation coefficient between the two variables was (.858)
and the value of Sig. = 0.0 which is smaller than the significance level of 0.05, which means
rejecting the null hypothesis and therefore there is statistically significant relationship
between Current Ratio and share price in the stock market (for this sector).
Hypothesis No.7
H0 : There is no statistically significant relationship between the ratio of share price to
dividends earned and prediction of the price per share in the stock market.
H1 : There is statistically significant relationship between the ratio of share price to
dividends earned and prediction of the price per share in the stock market.
The results showed that the correlation coefficient between the two variables was (.0420)
and the value of Sig. = 0.033 which is smller than the significance level of 0.05, which means
rejecting the null hypothesis and therefore there is no statistically significant relationship
between Current Ratio and share price in the stock market (for this sector).
81
Hypothesis No. 8
H0 :There is no statistically significant relationship between book value per ordinary share
and prediction of the price per share in the stock market.
H1 : There is statistically significant relationship between book value per ordinary share
and prediction of the price per share in the stock market.
The results showed that the correlation coefficient between the two variables was (.525)
and the value of Sig. = 0.009 which is smaller than the significance level of 0.05, which
means rejecting the null hypothesis and therefore there is statistically significant
relationship between Current Ratio and share price in the stock market (for this sector).
Hypothesis No. 9
H0 :There is no statistically significant relationship between current assets turnover ratio
and prediction of the price per share in the stock market.
H1 : There is statistically significant relationship between current assets turnover ratio and
prediction of the price per share in the stock market.
The results showed that the correlation coefficient between the two variables was (-.008)
and the value of Sig. = 0.487 which is greater than the significance level of 0.05, which
means accepting the null hypothesis and therefore there is statistically significant
relationship between Current Ratio and share price in the stock market (for this sector).
Hypothesis No.10
H0 :There is no statistically significant relationship between fixed assets turnover ratio and
prediction of the price per share in the stock market.
H1 : There is statistically significant relationship between fixed assets turnover ratio and
prediction of the price per share in the stock market.
82
The results showed that the correlation coefficient between the two variables was (-.455)
and the value of Sig. = 0.022 which is smaller than the significance level of 0.05, which
means rejecting the null hypothesis and therefore there is statistically significant
relationship between Current Ratio and share price in the stock market (for this sector).
Hypothesis No.11
H0 :There is no statistically significant relationship between Profit to sales ratio (profit
margin)and prediction of the price per share in the stock market.
H1 : There is statistically significant relationship between Profit to sales ratio (profit
margin)and prediction of the price per share in the stock market.
The results showed that the correlation coefficient between the two variables was (.414)
and the value of Sig. = 0.035 which is smaller than the significance level of 0.05, which
means rejecting the null hypothesis and therefore there is statistically significant
relationship between Current Ratio and share price in the stock market (for this sector).
83
Fifth: Industry Sector
Arab Company for Paints Products and Jerusalem Cigarette Company
Determine the correlation coefficients and hypothesis testing
Has been selected (11) of this sector variables to measure the contribution to predict stock
price, where the value was calculated rates of these variables at the 0.05 level of
significance was calculated coefficient of correlation between the statistical variable of each
of the independent variables and the results were as shown in Table 6.
Table (6)
Correlation coefficients between the dependent variable and the independent variables
Independent variables
Coefficient of
correlation (r)
% (r2)
Correlation
Value (sig.)
Current Ratio
- 0.501
25.07
0.012
Return on assets ratio
0.680
46.18
0.000
Return on equity ratio
0.808
65.31
0.000
the ratio of current liabilities
to equity
0.737
54.25
0.000
Earnings Per Share (EPS)
0.187
3.49
0.215
ratio of market value to book
value
0.909
82.59
0.000
the ratio of share price to
dividends earned
-0. 348
12.10
0.066
book value per ordinary
share
0.818
66.96
0.000
current assets turnover ratio
0.251
6.31
0.143
fixed assets turnover ratio
0.835
69.66
0.000
Profit to sales ratio (profit
margin)
0.739
54.66
0.000
84
A comparison between the variables that have been identified for this sector and between
the actual results of the correlation coefficients that show the real relationship between the
dependent variable and the independent variables to verify the validity of hypotheses for
the sector mentioned in the light of the results shown by the above table shows the
following:
Hypothesis No. 1
H0 :There is no statistically significant relationship between Current Ratio and prediction
of the price per share in the stock market.
H1 : There is statistically significant relationship between Current Ratio and prediction of
the price per share in the stock market.
The results showed that the correlation coefficient between the two variables was (-.501)
and the value of Sig. = 0.012 which is smaller than the significance level of 0.05, which
means rejecting the null hypothesis and therefore there is statistically significant
relationship between Current Ratio and share price in the stock market (for this sector).
Hypothesis No. 2
H0 :There is no statistically significant relationship between Return on assets ratio and
prediction of the price per share in the stock market.
H1 : There is statistically significant relationship between Return on assets ratio and
prediction of the price per share in the stock market.
The results showed that the correlation coefficient between the two variables was (.680)
and the value of Sig. = 0.000 which is smaller than the significance level of 0.05, which
means rejecting the null hypothesis and therefore there is statistically significant
relationship between Current Ratio and share price in the stock market (for this sector).
85
Hypothesis No. 3
H0 :There is no statistically significant relationship between Return on equity ratio and
prediction of the price per share in the stock market.
H1 : There is statistically significant relationship between Return on equity ratio and
prediction of the price per share in the stock market.
The results showed that the correlation coefficient between the two variables was (.808)
and the value of Sig. = 0.000 which is smaller than the significance level of 0.05, which
means rejecting the null hypothesis and therefore there is statistically significant
relationship between Current Ratio and share price in the stock market (for this sector).
Hypothesis No. 4
H0 :There is no statistically significant relationship between the ratio of current liabilities
to equity and prediction of the price per share in the stock market.
H1 : There is statistically significant relationship between Return on equity ratio and
prediction of the price per share in the stock market.
The results showed that the correlation coefficient between the two variables was (.737)
and the value of Sig. = .000 which is smaller than the significance level of 0.05, which means
rejecting the null hypothesis and therefore there is statistically significant relationship
between Current Ratio and share price in the stock market (for this sector).
Hypothesis No. 5
H0 :There is no statistically significant relationship between earnings Per Share (EPS) and
prediction of the price per share in the stock market.
H1 : There is statistically significant relationship between earnings Per Share (EPS) and
prediction of the price per share in the stock market.
86
The results showed that the correlation coefficient between the two variables was (.187)
and the value of Sig. = .215 which is greater than the significance level of 0.05, which means
accepting the null hypothesis and therefore there is statistically significant relationship
between Current Ratio and share price in the stock market (for this sector).
Hypothesis No.6
H0 :There is no statistically significant relationship between ratio of market value to book
value and prediction of the price per share in the stock market.
H1 : There is statistically significant relationship between ratio of market value to book
value and prediction of the price per share in the stock market.
The results showed that the correlation coefficient between the two variables was (.909)
and the value of Sig. = 0.000 which is smaller than the significance level of 0.05, which
means rejecting the null hypothesis and therefore there is statistically significant
relationship between Current Ratio and share price in the stock market (for this sector).
Hypothesis No.7
H0 : There is no statistically significant relationship between the ratio of share price to
dividends earned and prediction of the price per share in the stock market.
H1 : There is statistically significant relationship between the ratio of share price to
dividends earned and prediction of the price per share in the stock market.
The results showed that the correlation coefficient between the two variables was (-0. 348)
and the value of Sig. = 0.066 which is greater than the significance level of 0.05, which
means accepting the null hypothesis and therefore there is no statistically significant
relationship between Current Ratio and share price in the stock market (for this sector).
87
Hypothesis No. 8
H0 :There is no statistically significant relationship between book value per ordinary share
and prediction of the price per share in the stock market.
H1 : There is statistically significant relationship between book value per ordinary share
and prediction of the price per share in the stock market.
The results showed that the correlation coefficient between the two variables was (.818)
and the value of Sig. = 0.000 which is smaller than the significance level of 0.05, which
means rejecting the null hypothesis and therefore there is statistically significant
relationship between Current Ratio and share price in the stock market (for this sector).
Hypothesis No. 9
H0 :There is no statistically significant relationship between current assets turnover ratio
and prediction of the price per share in the stock market.
H1 : There is statistically significant relationship between current assets turnover ratio and
prediction of the price per share in the stock market.
The results showed that the correlation coefficient between the two variables was (0.251)
and the value of Sig. = 0.143 which is greater than the significance level of 0.05, which
means accepting the null hypothesis and therefore there is statistically significant
relationship between Current Ratio and share price in the stock market (for this sector).
Hypothesis No.10
H0 :There is no statistically significant relationship between fixed assets turnover ratio and
prediction of the price per share in the stock market.
H1 : There is statistically significant relationship between fixed assets turnover ratio and
prediction of the price per share in the stock market.
88
The results showed that the correlation coefficient between the two variables was (0.835)
and the value of Sig. = 0.000 which is smaller than the significance level of 0.05, which
means rejecting the null hypothesis and therefore there is statistically significant
relationship between Current Ratio and share price in the stock market (for this sector).
Hypothesis No.11
H0 :There is no statistically significant relationship between Profit to sales ratio (profit
margin)and prediction of the price per share in the stock market.
H1 : There is statistically significant relationship between Profit to sales ratio (profit
margin)and prediction of the price per share in the stock market.
The results showed that the correlation coefficient between the two variables was (0.739)
and the value of Sig. = 0.000 which is smaller than the significance level of 0.05, which
means rejecting the null hypothesis and therefore there is statistically significant
relationship between Current Ratio and share price in the stock market (for this sector).
89
Chapter Five
Results and recommendations
90
Introduction:
This chapter deals with the findings of the researcher after discussing the
theoretical framework for the study and the applied study to facilities listed
on the Palestine Securities Exchange as well as the recommendations in the
light of the most important findings of the study.
91
First: Results
In the light of the above, the following conclusions can be drawn:
1- There are several parties that benefit from the process of financial analysis when
making decisions whether from inside or outside the facility vary in terms of their
respective interest in the results of the analysis.
2- No longer process of financial analysis is limited to the quantitative content of the
book numbers shown by published financial statements, but exceeds the attention
of the financial analyst in the research behind these numbers of semantics.
3- To perform financial analysis process its desired role required the existence of
multiple criteria to measure performance and to compare the results that are
reached.
4- When analyzing the financial statements of an entity that can use a large number of
financial ratios which can be divided into groups and each group measure and
examine a particular phenomenon, depending on the purpose of the financial
analysis process.
5- In the insurance sector was to test the ability of a group of independent variables
(financial ratios) to predict the variable's (share price) using statistical tests for
National Insurance and National Insurance Group in the period between (20102012) and through 8 financial ratios, and the test results has been showed that
there are (3) variables has statistically a significant relationship at the price per
share.
6- In the banking sector has been testing the ability of a group of independent
variables (financial ratios) to predict the variable's (share price) using statistical
tests to Quds Bank for Development and Investment and the Palestine Investment
Bank in the period between (2010-2012) and through the 8 financial ratios, and the
test results has been showed that there are (3) variables has statistically a
significant relationship at the price per share.
92
7- In the investment sector has been tested the ability of a group of independent
variables (financial ratios) to predict the variable's (share price) using statistical
tests of Palestine Real Estate Investment Company and the Palestine Development
and Investment in the period between (2010-2012) and through 9 financial ratios,
and the test results has been showed that there are (4) variables has statistically a
significant relationship at the price per share.
8- In the services sector was to test the ability of a group of independent variables
(financial ratios) to predict the variable's (share price) using statistical tests to the
Palestinian Telecommunications Company and Arab Real Estate Establishment in
the period between (2010-2012) and through 11 financial ratios, and the test
results has been showed that there are (4) variables has statistically a significant
relationship at the price per share.
9- In the manufacturing sector has been tested the ability of a group of independent
variables (financial ratios) to predict the variable's (share price) using statistical
tests to Jerusalem Cigarette Company and the Arab Company for Paints in the period
between (2010-2012) and through 11 financial ratios, and the test results has been
showed that there are (4) variables has statistically a significant relationship at the
price per share.
93
Second: Recommendations
1- Attention to the process of financial analysis because of its active role in the
statement of financial position of the facilities, as well as its role in rationalizing
investment decisions.
2- The need to claim establishments registered with the preparation of its financial
statements according to international accounting standards in order to standardize
the procedures and rules that are relied upon in the preparation of these lists in
order to help investors to make comparisons between the performances of
enterprises in the same sector with each other when making investment decision.
3- Need to focus on the accuracy of the data contained in the financial statements and
the availability of transparency in the disclosure of the contents.
4- Need to claim the listed facilities to prepare cash flows statement in addition to the
balance sheet statement and profit and loss statement because of their importance
when making investment decisions.
5- Investors can use the findings of this study and specific to each sector to predict the
stock price in order to rationalize their investment decisions and rely on the
scientific basis for taking such decisions.
6- The facilities must make researches and studies to find out the factors affecting the
stock price and predict what could be the situation in the future in order to take the
necessary procedures to avoid the negatives related to performance.
7- Advised to conduct a study on this subject using quarterly data for all
establishments listed on the Palestine Securities Exchange for more accurate
predictions.
94
References:
The Holy Quran
First: Arabic books
1- Sayah, Abdul-Sattar al-Ameri, Saud (2006) financial management theoretical
frames and practical situations, Jordan, Aman, Dar Wael for Publishing and
Printing, Second Edition.
2- Matar, Mohammed (2003) Recent trends in the financial and credit analysis,
Jordan, Aman, Dar Wael for Publishing and Printing, First Edition.
3- Al Adam, yohana and Rizq, Saleh (2006) management accounting and
contemporary administrative policies, Jordan, Aman, Hamed Publishing and
Distribution, second edition.
4- Karajeh and others (2002) management and financial analysis, Jordan, Aman,
Safaa for Publishing and Distribution, second edition.
5- Aql, Mofleh (2006) Introduction to financial management and financial
analysis, Jordan, Aman, Dar Ajnadeen for publication and distribution, the second
edition.
6- Hanafi, Abdul Ghaffar (2003) stock exchange, Egypt, Alexandria, Dar new
university for publication.
7- Assar and others (2001) Management and Financial Analysis, First Edition,
Jordan, Aman, Dar Baraka for publication and distribution.
8- Aql, Mofleh (2000) Introduction to financial management and financial
analysis, Jordan, Aman, the future of the publishing house and distribution.
9- Ramadan, Ziad (1997), the basics of financial analysis, Jordan, Aman, Dar Wael for
Print Publishing, fourth edition.
95
Second: periodicals
1- Ershaid, Abdel Muti (2004), the determinants of stock prices in the Amman
Stock Exchange, Basaer magazine, Amman, p 197-218.
2- Zubi, Khalifa (2004), the causal relationship between the inflation rate and the
index of stock prices in the Amman Financial Market, Muta magazine for
Research and Studies, Amman, pp. 187-203.
3- Aldbay, safe and Nassar, Mohammed (2001), Are stock prices precede accounting
profits in reversing the appropriate information to determine the value of the
facility, Journal of Studies, Amman, pp. 54-66.
4- Zubi, Bashir (2000), the impact of macroeconomic factors on the general index
of the stock prices in the Amman Financial Market (DFM) during the period
(1978, 1998), Journal of Studies, Amman, pp. 321 – 330.
5- Hassani, Sadiq (1995), contemporary entrance of the financial analysis, the Arab
chartered accountant Amman, pp. 18-27
Third: The Masters
1- Sharab, Sabah (2006) the effect of the announcement of the dividend on the
share prices of companies listed on the Palestine Securities Exchange,
(Master), Islamic University - Gaza.
2- Najm, Anwar (2006) over the perception of investors in Palestine Securities of
the importance of the use of financial accounting information to rationalize
investment decisions, (Master), Islamic University - Gaza.
3- Kahlout, Khalid (2005) The extent to which the commercial banks' dependence
on financial analysis in the credit decision rationalization, (Master), Islamic
University - Gaza.
96
Fourth: foreign books
1- Harringtonn, Diana R (1993) "Corporate Financial Analysis" 4 edition , USA: Boston ,
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2- Pilbeam, keith (2007), "Finance & Financial Markets" 10 edition , England, Bristol.
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USA
4- Noor, Mahmood &Al-nami, Adnan (2003) " Financial & Banking " 1 edition , Amman,
daralmassira.
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Management" Bruce Rogovin , USA
6- Gapenski, Louis C &Brigham, Eugene F (1994), " Financial Management" 7 edition , USA
Sixth: websites:
www.sea.org.sa / Saudi Economic Association website
www.p-s- e.com / PSE Stock Exchange website
www.pma.palestine.org / Palestinian Monetary Authority website
www.paltel.ps/ Palestinian Telecommunications Company website
97