The Impact of Financial Ratios on Stock Returns: Evidence from the Tehran Stock Exchange

Abstract

This study investigates the impact of various financial ratios, including liquidity, profitability, leverage, and activity ratios, on the stock returns of companies listed on the Tehran Stock Exchange (TSE) from 2019 to 2023. The primary objective is to analyze the relationship between these fundamental indicators and stock performance using a multiple regression framework and a comprehensive set of statistical tests. The methodology employs a descriptive-correlational design using panel data from a sample of 167 firms. Data analysis was conducted using significance tests for regression coefficients (t-test and F-test), alongside diagnostic tests for heteroskedasticity (Breusch-Pagan), autocorrelation (Durbin-Watson), multicollinearity, and stationarity (Unit Root test). The results indicate a significant and positive relationship between liquidity ratios and profitability ratios with stock returns. Conversely, leverage ratios are found to have a negative and significant effect on stock returns. Activity ratios also show a positive and significant impact. These findings suggest that improving liquidity, profitability, and operational efficiency can enhance stock returns, while the excessive use of debt (high leverage) may increase financial risk and consequently reduce stock returns. Overall, the study clearly demonstrates that managers and investors should carefully analyze financial ratios to make optimal financial decisions, ultimately enhancing corporate financial performance and shareholder value.