A correlation is a statistical measure of the relationship between two variables. The measure is best used in variables that demonstrate a linear relationship between each other. The correlation coefficient is a value that indicates the strength of the relationship between variables. The coefficient can take any values from -1 to 1.
The interpretations of the values are: - -1: Perfect negative correlation. The variables tend to move in opposite directions (i.e., when one variable increases, the other variable decreases).
- 0: No correlation. The variables do not have a relationship with each other.
- 1: Perfect positive correlation. The variables tend to move in the same direction (i.e., when one variable increases, the other variable also increases).
In the above correlation matrix we prepared using our data set of over 50 key fundamental financial metrics, we ran the correlations between a few key fundamental financial metrics to understand their impact on Earnings Per Share. We chose 3D Systems Corp in our analysis. As you can see, over the last 10 years, Earnings Per Share has a positive correlation between Cash Flow Liquidity, Gross Margin, and Profit Margin and a negative correlation between Debt Ratio, Operating Expense as a % of Sales, and Total Asset Turnover. Since each company will have its own correlation matrix, it's critical for portfolio and investment managers to incorporate these profiles into their asset allocation and risk mitigation strategies. In order to calculate the correlation coefficient you must undertake the following steps: - Obtain a data sample with the values of x-variable and y-variable.
- Calculate the means (averages)
*x̅*for the x-variable and*ȳ*for the y-variable. - For the x-variable, subtract the mean from each value of the x-variable (let’s call this new variable “a”). Do the same for the y-variable (let’s call this variable “b”).
- Multiply each a-value by the corresponding b-value and find the sum of these multiplications (the final value is the numerator in the formula).
- Square each a-value and calculate the sum of the result
- Find the square root of the value obtained in the previous step (this is the denominator in the formula).
- Divide the value obtained in
*step 4*by the value obtained in*step 7*.
As you can see, the manual calculation of the correlation coefficient is an extremely tedious process, especially if the data sample is large. However, with SEC Reporting Analytics data set, now available Snowflake Data Marketplace, you don't need to spend hundreds of thousands of dollars and several years to develop quality quant financial training data. Your current team of data scientists, analytics managers, and portfolio managers can begin developing their own custom correlation, regression, and predictive analysis TODAY! We also provide ad-hoc correlation requests for individual tickers or a basket of tickers. Contact support@secreportinganalytics.com with your requests. We look forward to hearing from you! Credit: SEC Reporting Analytics Corporate Finance Institute
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Retail industry stock prices as of 3/26/2021 are higher than the average stock price since the start of Q42020. Market-to-book values for many firms within the industry are trading under 3x, including
CVS Health ($CVS) and Aramark ($ARMK), both of which have several billions of dollars in cash on hand. The M/B ratio compares a company’s market value to its book value. The market value of a company is its share price multiplied by the number of shares outstanding. The book value is the net assets of the company. A lower M/B ratio could mean stocks are undervalued. However, it could also mean something is fundamentally wrong with the company. The P/B ratio also indicates whether you’re paying too much for what would remain if the company went bankrupt immediately. The P/B ratio has been favored by value investors for decades and is widely used by market analysts. Traditionally any value under 1 is considered a good P/B for value investors, indicating a potentially undervalued stock. However, value investors may often consider stocks with a P/B value under 3 as their benchmark. What counts as a “good” price-to-book ratio will depend on the industry in question and the overall state of valuations in the market. For example, between 2010 and 2020 there was a steady rise in the average price-to-book ratio of the technology companies listed on the Nasdaq stock exchange, roughly tripling during that period. An investor assessing the price-to-book ratio of one of these technology companies might therefore choose to accept a higher average price-to-book ratio, as compared to an investor looking at a company in a more traditional industry in which lower price-to-book ratios are the norm.Example:Assume that a company has $100 million in assets on the balance sheet and $75 million in liabilities. The book value of that company would be calculated simply as $25 million ($100M - $75M). If there are 10 million shares outstanding, each share would represent $2.50 of book value. If the share price is $5, then the P/B ratio would be 2x (5 / 2.50). This illustrates that the market price is valued at twice its book value. Please also connect with our social media pages for future market opinions, picks, and insights. Twitter @SECReporting LinkedIn @SECReportingAnalytics Access SEC Reporting Analytics dataset on Snowflake today to perform your own analysis and insights to share with us here on our community page.Credit: SEC Reporting Analytics Investopedia Finance, Insurance, and Real Estate industry stock prices as of 3/15/2021 are higher than the average stock price since the start of Q42020. Market-to-book values for many firms within the industry are trading under 3x, including
Network 1 Technology INC ($NTIP) and Acacia Research Corp ($ACTG), both of which are also generating positive EPS(Earnings Per Share) for investors. The M/B ratio compares a company’s market value to its book value. The market value of a company is its share price multiplied by the number of shares outstanding. The book value is the net assets of the company. A lower M/B ratio could mean stocks are undervalued. However, it could also mean something is fundamentally wrong with the company. The P/B ratio also indicates whether you’re paying too much for what would remain if the company went bankrupt immediately. The P/B ratio has been favored by value investors for decades and is widely used by market analysts. Traditionally any value under 1 is considered a good P/B for value investors, indicating a potentially undervalued stock. However, value investors may often consider stocks with a P/B value under 3 as their benchmark. What counts as a “good” price-to-book ratio will depend on the industry in question and the overall state of valuations in the market. For example, between 2010 and 2020 there was a steady rise in the average price-to-book ratio of the technology companies listed on the Nasdaq stock exchange, roughly tripling during that period. An investor assessing the price-to-book ratio of one of these technology companies might therefore choose to accept a higher average price-to-book ratio, as compared to an investor looking at a company in a more traditional industry in which lower price-to-book ratios are the norm.Example:Assume that a company has $100 million in assets on the balance sheet and $75 million in liabilities. The book value of that company would be calculated simply as $25 million ($100M - $75M). If there are 10 million shares outstanding, each share would represent $2.50 of book value. If the share price is $5, then the P/B ratio would be 2x (5 / 2.50). This illustrates that the market price is valued at twice its book value. Please also connect with our social media pages for future market opinions, picks, and insights. Twitter @SECReporting LinkedIn @SECReportingAnalytics Access SEC Reporting Analytics dataset on Snowflake today to perform your own analysis and insights to share with us here on our community page.Credit: SEC Reporting Analytics Investopedia Precious Metals & Energy industry stock prices as of 3/5/2021 are higher than the average stock price since the start of Q42020. Further, price-to-book values for many firms within the industry are trading under 3x, some as high as 40x. The P/B ratio compares a company’s market stock price to its book value. The market value of a company is its share price multiplied by the number of shares outstanding. The book value is the net assets of the company. A lower P/B ratio could mean stocks are undervalued. However, it could also mean something is fundamentally wrong with the company. The P/B ratio also indicates whether you’re paying too much for what would remain if the company went bankrupt immediately. The P/B ratio has been favored by value investors for decades and is widely used by market analysts. Traditionally any value under 1 is considered a good P/B for value investors, indicating a potentially undervalued stock. However, value investors may often consider stocks with a P/B value under 3 as their benchmark. What counts as a “good” price-to-book ratio will depend on the industry in question and the overall state of valuations in the market. For example, between 2010 and 2020 there was a steady rise in the average price-to-book ratio of the technology companies listed on the Nasdaq stock exchange, roughly tripling during that period. An investor assessing the price-to-book ratio of one of these technology companies might therefore choose to accept a higher average price-to-book ratio, as compared to an investor looking at a company in a more traditional industry in which lower price-to-book ratios are the norm.
Example:Assume that a company has $100 million in assets on the balance sheet and $75 million in liabilities. The book value of that company would be calculated simply as $25 million ($100M - $75M). If there are 10 million shares outstanding, each share would represent $2.50 of book value. If the share price is $5, then the P/B ratio would be 2x (5 / 2.50). This illustrates that the market price is valued at twice its book value. Please also connect with our social media pages for future market opinions, picks, and insights. Twitter @SECReporting LinkedIn @SECReportingAnalytics Access SEC Reporting Analytics dataset on Snowflake today to perform your own analysis and insights to share with us here on our community page.Credit: SEC Reporting Analytics Investopedia Disclaimer: Information contained in this report are only opinions and only provided for research purposes and not investment advice. Stocks, commodities, securities, and such are all very similar when it comes to trading. We buy, we sell, we hold. All this in order to make a profit. The question is: How can Data Science help us when it comes to making these trades on the stock market?
Credit: Towards Data Science and Marco Santos Ratios can be invaluable tools for making decisions about companies you might want to invest in. Across the industry, they are used by individual investors and professional analysts, and there are a variety of ratios to use. Financial ratios are typically cast into four categories.
Credit: Investopedia and Jonas Elmerraji Great research article posted on Analytics Vidhya on correlating stock price performance and financial ratios. With our unique data set, you can begin integrating this research and more into your long and short term trading strategies. We are here to help as much or as little as you need.
Happy Investing!! Credit: Analytics Vidhya and Gaurav Khatri |
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