Debt Equity Ratio and Stock Market Returns: An Empirical Analysis of Indian Stock Market

Benjamin Graham, popularly known as the father of fundamental analysis, proposed to invest in stocks having higher book value of the equity than the total debt. The present study intends to examine the profitability of stocks qualifying the said valuation metric in the Indian stock market. The study has been conducted for the time frame of 15 years spanning from 2003 to 2015. The stocks so selected have been retained for one and two years. The returns obtained have been analysed with the help of one sample T-test and capital asset pricing model. The results showed that the valuation metric provided higher average returns than the market index across the time frame of the study. The asset pricing model confirmed the lesser volatility of the stocks and presence of extraordinary returns in case of two years' retention period. The rule thus can be used by analysts, fund managers and investors for optimising the reward to risk ratio of their portfolios