Revealing connections

To start our investigation for shares with huge upside potential, we have to check the connections between individual ratios quantified a year ago and the total return of the next year. For the sake of this chapter, we picked the following ratios. We took the values from 1 year earlier so that we can contrast these with last year's TRS:

• Cash/assets 1 year ago

• Net fixed assets/total number of assets 1 year ago

• Assets/1000 employees 1 year ago

• Price/cash flow average of last 5 years 1 year ago

• Price/cash flow 1 year ago

• Operating income/net sales 1 year ago

• Dividend payout ratio 1 year ago

• Asset turnover 1 year ago

• P/BV 1 year ago

• Operating income/net sales 1 year ago

• Revenue growth in the last 1 year 1 year ago

• Long-term debt/capital 1 year ago

• Debt/EBITDA 1 year ago

• Market capitalization 1 year ago

• P/E 1 year ago

Calculating Pearson's correlation coefficients may be a good start:

d_filt <- na.omit(d)[,setdiff(1:19, c(1,2,18))]
cor_mtx <- cor(d_filt)
round(cor_mtx, 3)

When looking...