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For this analysis, I have used Dataset2 from the provided sheet, focusing on three numerical variables: the Current Ratio, P/E, and Earnings Yield of corporate bonds.
Here, X1 represents the Current Ratio, X2 represents the P/E Ratio, and X3 represent the Earnings Yield.
Explanation of Variables :
Current ratio - This shows if a company has enough short - term assets to pay its short - term debts . A higher ratio means better short - term financial health.
P/E ( Price-to-earnings ) Ratio - This compares a company's stock price to the earnings . It helps investor see if the company's stock might be over or undervalued .
Earnings Yield - This shows the return investors earn on each dollar invested in the company . A higher value means better return relative to the stock price .
Below is the scatter plot illustrating the relationship between X1 ( Current Ratio ) and X2 (P/E Ratio.)
Insights between X1 and X2: A positive correlation between the Current Ratio and P/E Ratio suggests that companies with greater liquidity (higher Current Ratio) tend to have higher market valuations (higher P/E). This connection indicates that strong liquidity signals financial stability, growth potential, and enhanced investor confidence, resulting in a greater willigness to pay for their shares.
Below is the scatter plot illustrating the relationship between X2 (P/E Ratio) and X3 (Earnings Yield).
Insights between X2 and X3: The scatter plot indicates a weak negative correlation between the P/E Ratio and Earnings Yield. This suggests that as the P/E Ratio increases, the Earnings Yield tends to decrease slightly. This relationship may imply that investors are willing to pay more for shares of companies with higher valuations, which could be associated with lower returns in terms of earnings yield.
Below is the scatter plot illustrating the relationship between X1 (Current Ratio) and X3 (Earnings Yield).
Insights between X1 and X3: The scatter plot shows a weak negative correlation between the Current Ratio and Earnings Yield. This indicates that as the Current Ratio increases, the Earnings Yield tends to decrease slightly. This relationship may suggest that companies with higher liquidity might not necessarily provide higher returns in terms of earnings yield, reflecting a potential trade-off between liquidity and profitability.
Below are the covariance between X1 & X2 , X2 & X3 and X1 & X3
The covariance between the Current Ratio and P/E Ratio is 0.3432, indicating a positive relationship: as the Current Ratio increases, the P/E Ratio tends to rise as well. In contrast, the covariance between the P/E Ratio and Earnings Yield is
-0.5564, suggesting a negative relationship: as the P/E Ratio increases, the Earnings Yield tends to decrease.
Additionally, the covariance between the Current Ratio and Earnings Yield is -1.1885, indicating a stronger negative relationship: as the Current Ratio increases, the Earnings Yield tends to decline. Together, these covariances illustrate that while liquidity (Current Ratio) is positively linked to market valuation (P/E Ratio), it is negatively associated with the returns generated (Earnings Yield).
Below are the mean & standard deviation for all three numerical Values .
Using Google Sheets, the calculated mean and standard deviation for each variable are as follows:
Current Ratio Mean = -0.424, Standard Deviation = 1.005
P/E Ratio Mean = 0.017, Standard Deviation = 1.410
Earnings Yield Mean = 0.507, Standard Deviation = 1.214
On average, companies in the dataset have a Current Ratio of -0.424, which may indicate potential liquidity issues. The P/E Ratio is 0.017, suggesting a very low market valuation, while the Earnings Yield is 0.507, indicating moderate returns. The standard deviation of 1.005 for the Current Ratio suggests significant variability in liquidity among companies. In contrast, a standard deviation of 1.410 for the P/E Ratio points to considerable variability in how companies are valued. Lastly, a standard deviation of 1.214 for Earnings Yield indicates a moderate level of dispersion in return across the dataset.
Using Google Sheets, the calculated mean and standard deviation for each variable are as follows:
Current Ratio Mean = -0.424, Standard Deviation = 1.005
P/E Ratio Mean = 0.017, Standard Deviation = 1.410
Earnings Yield Mean = 0.507, Standard Deviation = 1.214
On average, companies in the dataset have a Current Ratio of -0.424, which may indicate potential liquidity issues. The P/E Ratio is 0.017, suggesting a very low market valuation, while the Earnings Yield is 0.507. indicating moderate returns. The standard deviation of 1.005 for the Current Ratio suggests significant variability in liquidity among companies. In contrast, a standard deviation of 1.410 for the P/E Ratio points to considerable variability in how companies are valued. Lastly, a standard deviation of 1.214 for Earnings Yield indicates a moderate level of dispersion in returns across the dataset.
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