PREDICTING STOCK PRICE USING HISTORICAL FINANCIAL INFORMATION WHY: Stock valuation is a function of many different variables: Actual profitability, perceived profitability, business announcements, etc Curious of how strong an influence changes in profitability ratios have on stock price Ratios: Gross Margin, Profit Margin, Return on Equity, Return on Assets, If a significant, then by how much would a change in ratio result in a change in price? Why bother? If a company’s profit margin for the next year can be estimated, can we then reasonably estimate what their stock price will be?

PREDICTING STOCK PRICE USING HISTORICAL FINANCIAL INFORMATION HOW: Obtain historical financial statements and historical stock prices of several companies Clean the data Calculate annual changes in stock price for each stock Store the balances of each account in the financial statements by account and by year Calculate the profitability ratios of each company for each year Calculate annual changes in ratio of each ratio for each year Aggregate the data such that: Gross Margin (or any other ratio) vs Change in Stock Price for all companies x = change in ratio and y = change in stock price Use aggregated data to find correlation between the two

PREDICTING STOCK PRICE USING HISTORICAL FINANCIAL INFORMATION RESULTS: Gross Margin won first place, but still not statistically significant enough Pearson’s r = 0.4 Profit margin, return on assets, return on equity all had much, much weaker r values Not surprising: A profitability ratio in and of itself is not sufficient info; does not give a complete picture of the company A profitability ratio is not universally comparable across companies Companies in the same industry: Amazon’s profit margin = 23.74, Ebay’s = Other factors have huge influence: EX: Starbucks announcing plans to open stores