Empirical examination of appropriateness of profitability ratios model in predicting shareholder wealth of Nairobi securities exchange listed non-financial firms, Kenya

Abstract

Financial statements based on requirements of international accounting standards and specific legislative requirements are considered by users to be objective indicators of performance, financial strength and shareholder value of an organization. Financial statement analysis is structured and scientific basis on which investment decisions of a firm are anchored. Studies on profitability ratios have mostly been carried out in developed capital markets with little emphasis on developing securities markets such as Nairobi Securities Exchange (NSE). The objective of this study was to evaluate appropriateness of profitability ratios model in predicting shareholder wealth of non-financial firms listed at NSE. Correlational research design was used. The study population was all firms listed at NSE during five financial years 2012 to 2016. A census of all non financial firms was conducted because study population was small. It was established that information provided by profitability ratios pre-tax margin (PTM), net profit margin (NPM), return on assets (ROA) and return on equity (ROE) were not statistically significant in influencing choice of shareholders of non financial firms listed at NSE. Also profitability ratios model was not statistically significant appropriate in predicting shareholder wealth of non financial firms listed at the NSE.