The Effect on Financial Ratios to Predict Company Profits and Stock Returns

Optimized decision making in the market of stocks and bonds needs utilizing suitable tools and skills in order to choose the best choices for investment. The most important financial information of corporations is their financial reports that help analyzing basics of stocks. Current research by basing basic information of corporation’s financial reports, has tried to examine traces of 10 instances of the most important financial ratios in the prediction of oncoming efficiency and profit of 252 companies out of those companies in the stock market of Tehran that their financial reports in a 6 year period (2001-2006) have been available. Research results show that profitability ratios and activity ratios can be proper predictive of oncoming efficiency in the stock market of Tehran. Nonetheless there is not a meaningful relationship between financial ratios and oncoming profits; that this may be due to smoothing of profits in Iranian companies.