The role of financial ratios in determining the stock prices: The case of Palestine stock exchange

The stock market plays an important determining role on the economy of a country. The stock market functions as a platform where capital is collected, investment opportunities are evaluated and the growth potential of companies is demonstrated. Stocks and other financial instruments on the stock market reflect the performance of companies and provide investors with an indicator of the health of the economy. Therefore, the stock market has a significant impact on the overall stability of countries' economies and their competitiveness in global markets. This study aims to identify the role of financial ratios in predicting stock prices of Palestinian corporations listed at Palestine stock market. The purpose of the study to show which ratios have the most impact on the stock prices. To achieve it, a set of financial ratios of (30) listed companies were tested using the available finansal data for the period 2017-2021. In the emprical part of the study, panel data regression (fixed and random effects model) was applied to determine the correlation of financial ratios with market stock prices for companies traded on the Palestine Stock Exchange, the analysis results were interpreted accordingly. The analysis results reveal that the relationship of only (3) variables, among the ratios determined as independent variables, with the stock prices determined as the dependent variable according to the panel data regression analysis fixed effects method, is statistically significant. It has been observed that both current ratio and asset turnover ratio have a negative significant relationships with stock prices. On the other hand, there are positive significant relationships between asit-test ratio and stock prices. The relationship between earnings per share, return on assets ratio, debt ratio, degree of operating leverage, equity turnover ratio, price earnings ratio and market value/book value ratios and stock prices was found to be insignificant. Finally, it can be stated that the explanatory power of the variables in the model remains limited. This result obtained in the study indicates the existence of other economic, social and political factors other than financial ratios in explaining stock prices and returns, which can be evaluated by conducting other possible studies.