Does Financial Performance Predict Stock Returns?

Amaira Aggarwal, Raghu Raja Mehra

Abstract: The relationship between a company's reported financial performance and the return earned by its shareholders is one of the oldest questions in finance, and one that remains unsettled in emerging markets. This paper examines whether fundamental indicators- return on equity, return on assets, earnings-per-share growth, sales growth, leverage and valuation multiples- carry information about subsequent stock returns for large listed Indian companies. Using a panel of 100 NIFTY 100 constituents over the financial years 2021 to 2025, the study computes seven fundamental ratios, sorts firms into quintiles, and estimates a multiple regression of one-year forward returns on standardised fundamentals. Return on equity shows the strongest positive association with forward returns (r = 0.41), followed by earnings-per-share growth (r = 0.36) and return on assets (r = 0.33); leverage shows the strongest negative association (r = -0.28). A portfolio of firms in the top fundamental quintile grew ₹100 to ₹201 over the period against ₹158 for the benchmark and ₹133 for the bottom quintile. However, the full model explains only about a third of the cross-sectional variation in returns, and explanatory power differs sharply by sector. The paper concludes that fundamentals shift the odds in an investor's favour without determining outcomes, and that the gap between accounting performance and market performance is best explained by expectations already embedded in price. All figures are illustrative constructions prepared to demonstrate the analytical method and should not be used as investment advice.

Keywords: financial performance; stock returns; fundamental analysis; return on equity; shareholder wealth; Indian equity market; efficient markets; valuation multiples

How to Cite?: Amaira Aggarwal, Raghu Raja Mehra, "Does Financial Performance Predict Stock Returns?", Volume 15 Issue 8, August 2026, International Journal of Science and Research (IJSR), Pages: 2111-2118, https://www.ijsr.net/getabstract.php?paperid=SR26825123814, DOI: https://dx.doi.org/10.21275/SR26825123814

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