What is the most effective stock ratio to invest in the stock market?

Stock ratios are one of the most used tools in fundamental analysis to help us with the valuation process and determine if a company is trading at an expensive or cheap price and if it is worth investing in it or not. I recently gave you a brief review of the ratios bursátiles más importantes, but it is also necessary to know which are the most effective when investing in the stock market, which is what we will see in this article.

What is the most effective stock market ratio to invest in the stock market?

What is the most effective stock ratio to invest in the stock market? This same question has been asked by Drexel University researchers Wesley R. Gray and Jack Vogel in their academic study called “FOR (in the study it appears as E / M)

  • EV / EBITDA (in the study it appears as EBITDA / TEV)
  • P / BV (B / M appears in the study)
  • EV / FCF (in the study it appears as FCF / TEV)
  • EV / GP (Company value between gross profit, in the study it appears as GP / TEV)
  • In the following table you can see the results of the study:

    What is the most effective stock market ratio to invest in the stock market

    The results are very interesting. The quintile with the cheapest EV / EBITDA is the one with the highest profitability (17,66%), followed closely by EV / FCF and EV / GP (16,57% and 16,35%). The quintile with the lowest PER obtains a 15,99% return, while that of the cheapest P / BV a 15,03%. As you can see, all the ratios used manage to beat the market, whose profitability has been 13,04%, although not all in the same way.

    The most effective stock market ratio is EV / EBITDA, whose difference between the quintile of cheapest shares and that of the most expensive shares is 9,69%. The second most effective ratio in the EV / GP, with a difference of 8,22%, while the other three ratios analyzed have a smaller difference, although also significant, around 5,50%.

    In summary, this is further proof of market inefficiency and how stock ratios can be a great tool in the financial analysis part of the valuation process to help us consistently outperform.