The Impact of ROAA, ROAE and EBITDA Margin Ratios on the Stock Prices of Global Listed Pharmaceutical Companies

Abstract

As a cornerstone of global health and a driver of economic progress, the pharmaceutical industry commands significant attention from investors and researchers seeking to understand the forces that shape its financial performance and stock valuations. This thesis investigates the relationship between financial ratios and quarterly stock prices of global publicly listed pharmaceutical (NEC) companies. The study examines whether the market efficiently incorporates publicly available information related to profitability ratios, including Return on Average Total Assets (ROAA), Return on Average Common Equity (ROAE), and EBITDA margin, into stock valuations. Using panel data for 30 pharmaceutical (NEC) companies from 01.01.2019 to 30.06.2024, the study employs R-Studio 4.1.3 to conduct Pearson correlation tests, Variance Inflation Factor (VIF) analysis and a series of diagnostic tests to ensure the selection of the most suitable model, including the Hausman test and the Breusch-Pagan Lagrangian Multiplier (LM) test; which all led to the use the fixed effect regression model with robust standard errors. The analysis reveals no statistically significant relationships between each individual indicator and the stock prices, indicating that the pharmaceutical (NEC) market is relatively efficient in processing information. However, the study also emphasizes that the pharmaceutical industry is subject to unique forces that can significantly impact stock valuations. Hence, factors like R&D breakthroughs, regulatory shifts, and competitive dynamics can all create volatility and potential mispricing. This suggests the need for further research into potential anomalies and a broader range of factors that influence stock prices in this complex industry.