The Impact of Financial Ratios on Investment Strategies in the UK Financial Sector

Abstract

This thesis investigates how financial ratios influence investment decisions in the UK financial market, focusing on FTSE 100 companies between 2019 and 2023. Adopting a mixed-methods design, the study combines quantitative econometric analysis with qualitative interviews to ensure both statistical rigor and contextual depth. The quantitative analysis tested the predictive power of profitability, leverage, liquidity, and dividend yield ratios alongside market-based indicators, particularly market capitalization growth. Results show that accounting ratios, when considered in isolation, offered limited explanatory power for cross-sectional returns. By contrast, market-based dynamics—especially market capitalization growth—proved strongly and consistently significant, increasing explanatory strength from about 6% to 80%. An unexpected leverage premium also emerged, suggesting compensation for higher risk. The qualitative findings complement these results, showing that Investors rarely Interpret ratios in isolation. Instead, they embed them within broader forward-looking frameworks that integrate market signals, industry dynamics, and qualitative judgment. Institutional investors tended to adopt structured, model-driven approaches, while private investors employed more flexible, heuristic strategies. Across both groups, market-based indicators were regarded as more relevant and forward-looking than static accounting measures. Overall, the study demonstrates that while accounting ratios remain useful reference tools, their predictive and interpretative value is moderated by dynamic market forces and investor discretion. The research contributes to academic debates on the relevance of financial information and offers practical implications for investors seeking to balance traditional fundamentals with market-oriented approaches. Limitations include the short-term horizon, the focus on large-cap firms, and the small qualitative sample. Future studies could extend the scope to different markets, longer periods, and emerging factors such as ESG metrics or behavioral dimensions.