An Empirical Study of Relation between Financial Performance, Profitability Trend and P/E Ratio Evidence from Iran

Since investors are looking for the desired revenue from their investments and risk reduction in their activities, they need tools to help them to achieve this. Information about profitability of firms and its trend and details of their financial context are among these tools. Study of the relation between incremental profitability trend and price ratio to profit in the firms that are listed in Tehran Stock Exchange and identifying features of these firms have been considered in this study and the goal of this study is to help active investors in this market to identify the firms with better stock performance potential . For this purpose 123 firms were studied for a 5- year period that these firms were from the listed firms in Tehran Stock Exchange (2009-2013). The used methodologies for the first hypothesis and to test the sub-hypotheses of the second hypothesis are Regression and ANOVA respectively. The results of this study show that there isn’t a significant relation between incremental profitability trends and P/E ratio. This result is different from the obtained results from the other conducted studies about similar firms in the US and Taiwan capital markets. Also there was a significant difference between incremental profitability trends and some financial ratios in contrast to other firms.

Keywords:

Profitability Trend , Price-Earnings Ratio (P/E) , Financial Performance of Firms