Background of the Study
• Background of the Study
A MULTIPLE DISCRIMINANT ANALYSIS ON FINANCIAL
RATIOS THAT IDENTIFIES INHERENT DISCRIMINATING
FACTORS OF A SUCCESSFULLY LISTED COMPANY FROM
THAT OF AN UNSUCCESSFUL ONE
(A Thesis Proposal))
Rizaldy S. Menor
Statement of the Problem
• Are there inherent discriminating factors found in
financial ratios subjected to statistical methods,
which would differentiate a financially successful
publicly listed company from a financially
unsuccessful publicly listed companies?
Statement of Hypothesis
• Certain Financial Ratios are indicators of a
successful/unsuccessful company in terms of the
ability of a Company stock to provide an increase
in its value computed through a stock return model
that can outperform the risk free rate. As such, it
can also predict as to what companies will be
successful/unsuccessful in the future based on the
said criterion.
– This thesis proposal aims to provide an update to a 2000
study conducted by Margarita P. Cabardo in her paper
entitled “An Investment Selection Model Using Multiple
Discriminant Analysis of Financial Ratios of Philippine
Listed Companies. The previous study was able to come up
with a General Model applicable to all listed companies in
the PSE and an Industry Specific Model for the
Commercial and Industrial Sector.
Objectives
• To demonstrate the use of Discriminant analysis in a
pragmatic application in finance.
• To find differences or factors between financially
successful and financially unsuccessful publicly listed
companies, which will best discriminate one group
from the other.
• To prove the significance of the resulting model
through various statistical and validation techniques.
• To provide a working model that can be used to
identify potential financial factors that would suggest an
investment choice between two capital assets.
Scope and Limitations
• Limited to Financial Statement of Listed
Companies in the Philippines
• No assumption on inter-industry modelling
exercise.
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 Significance of the Study
• Development in Philippine Economy
– Government goal to attract expatriate Filipinos to
invest in Philippine Stock Market
– Portfolio investments have shown stead
improvements.
– BSP likely to lower interest rates making money
available in market.
– Faster economic growth in the Philippines
– Change from manufacturing industries such as
BPO, tourism and mining.
Review of Literature
• Financial Ratios
• Fundamental Analysis
• Stock Prices, Information Availability and Lag
Period
• Discriminant Analysis
Research Gap
• With a lot of more sophisticated investment
selection model used in determining optimum
portfolio, there were scant finance research as to
the use of financial ratios as a predictor of stock
performance more so in the Philippine setting.
• Recent study of Lettau and Nieuwerburgh entitled
Reconcilinig the Return Predictability Evidence
Oxford University 2007 said that this area is still
controversial despite several studies showing in
favor/against the issue.
Other Developments
• Changes in PSE Sector and Subsector
Classification System
• Sarbanes Oxley Act
• Philippine Accounting Standards moving towards
International Accounting Standards
Literature Map
• Please see literature Map.
Theoretical Framework
• Theoretical/Conceptual Framework
– “Financial ratios have been of the firsts and most
effective credit tools that have been available to
analysts.” (Altman 1998)
• “Based on associations between the individual signals
and future earnings, there is an economic justification
for analysts and investors to rely on many, but not all,
of the fundamental signals identified when assessing
future firm performance.”
• Operational Framework
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 Conceptual Framework Operational Framework

• Binary Pair (0 – 1) Model (success – failure)

• 14 Identified Financial Ratios
• Risk Free Rate
• Listed Company Industry Classification

Financial Ratios Used As Independent Variables Method of Data Collection

Table 1
Ratios Variable Formula
Valuation
Price/Earnings X1 Current Price/Diluted EPS (DILEPS)
Price/Cash Flow X2 Current Price/Cash Flow Per Share • Financial Data to be provided by data provider
Price/Book Value X3 Current Price/Book Value Per Share
Dividend Yield
Dividend Pay-
X4 Dividend Per Share/Current Price Technistock. This includes stock price, financial
Pay-out X5 Dividend Per Share/DILEPs
Basic EPS
Management Effectiveness
X6 Net Income/Current Common Share data and T-bill rate. Period shall be from 2000 to
Return on Assets
Return on Equity
X7
X8
Net Income / Total Assets
Net Income / Shareholders’ Fund
2010.
Financial Strength
Debt to Equity X9 Total Liabilities/Shareholder’s Fund
Debt to Ratio X10 Total Liabilities/Total Assets
Equity Ratio X11 Shareholders fund/Total Assets
Profitability
Net Profit Margin X12 Net Income / Sales
Liquidity
Current Ratio X13 Current Assets/Current Liabilities
Quick Ratio X14 (Cash + Securities + Accounts Receivables)/Current Liabilities
Notes:
Notes:
1. DILEPS – (Net income + Interest Paid on Convertibles)/Diluted Share
2. BVPS – (Shareholder Fund – Preferred Capital Stock)/Current Common Share
3. CFPS – Net income * zero (depreciation) + depreciation

Method of Data Analysis How to Further Improve the Study

• Multiple Discriminant Analysis • Use of Logit Analysis in Developing the Forecasting Model
instead of MDA [Glezakos, Mylonakis, Oikonomou 2010)
– Stage 1: Objectives of Discriminant Analysis
• Create a per industry model in a philippine setting in agreement
– Stage 2: Research Design and Independent with the findings of Castagna 1983.
Variables • Involve more ratios especially cash flow related ratios (e.g. Cash
– Stage 3: Assumptions of the Discriminant Analysis Interest Coverage Ratio)
– Stage 4: Estimation of the Discriminant Model and • Create a study that combines Fundamental Analysis (Ratios)
and Technical Analysis Impact.
Assessing the Overall Fit
• Study the potential of Fundamental Analysis With Artificial
– Stage 5: Interpretation of Results Neural Network (Yildiz Yezegel 2010)
– Stage 6: Validation of the Results