The relative importance of financial ratios in creating shareholders' wealth

Abstract

The purpose of the study is firstly to use Data Envelopment Analysis (DEA) to aggregate the overall performance (technical efficiency) of firms to convert scarce resources into outputs that create wealth for shareholders, and secondly, to determine the degree to which this mentioned performance is reflected in a number of profitability and market value ratios. Annual financial statement data were used for 55 manufacturing companies listed on the JSE Limited over a five-year period in a cross-sectional analysis. The study found that return on equity has the most significant relationship with technical efficiency, followed by return on assets. The market value ratios price/earnings and dividend yield have no significant relationship with technical efficiency. The value of this study is that it is the first of its kind where technical efficiency, which aggregated operating, profitability and marketability efficiencies, is used to detrmin the relative importance of not only the readily available profitability ratios, but also market value ratios