Financial ratios used by equity analysts in Mexico and stock returns

A sample of recommendation reports by equity analysts covering Mexican publicly traded firmsin Mexico is studied. We propose a set of “most preferred” financial ratios from this sample. It is found that the most preferred ratios by equity analysts, a group of sophisticated users, are not those ratios typically covered in financial textbooks. Moreover, by using panel regression analysis, we test the relationship between financial ratios and leading stock returns during the 1995–2011 period. Overall, consistent with the efficient market hypothesis, the resultsshow that estimates of financialratios most preferred by equity analysts have predictive power on 1-year future stock returns. We find no evidence of predictive power on 2-year stock returns. All Rights Reserved © 2015 Universidad Nacional Autónoma de México, Facultad de Contaduría y Administración. This is an open access item distributed under the Creative Commons CC License BY-NC-ND 4.0.