Financial Ratios and Firm's Value in the Bahrain Bourse

Abstract

This paper attempts to measure how financial ratios explain the firms' value through price earnings ratio or market to book ratio in the Bahrain Bourse. All listed companies in Bahrain Bourse, with the exception of the closed ones, are used over the period of 1995 to 2013. Using all the main categories in financial ratios such as profitability, liquidity, efficiency and debt, the paper found that return on assets (ROA) is the most determinant factor in explaining the market value followed by financial leverage and beta. Furthermore, the findings revealed that the size of the firm also has a significant effect on its market value. The size of the firm is measured through total assets and Tobin's Q ratio. In this respect, investors perceive different signals from small firms compared to large ones, and from growth firms compared to no-growth firms. On the sector analysis, it is found that ROA is the main determinant factor for explaining the value of the firm.

Keywords: Bahrain Bourse, Firm Value, Tobin's Q, Financial Ratios, Size and Sector Effect.