Open AccessArticle

Dynamics of Stock Prices on the Bulgarian Stock Exchange Against the Background of Fundamentals

Dimiter Nenkov

and

Yanko Hristozov

Finance Department, University of National and World Economy, 1700 Sofia, Bulgaria

Author to whom correspondence should be addressed.

J. Risk Financial Manag. 2024, 17(12), 576; https://doi.org/10.3390/jrfm17120576

Submission received: 1 November 2024 / Revised: 13 December 2024 / Accepted: 17 December 2024 / Published: 22 December 2024

(This article belongs to the Special Issue Corporate Finance: Financial Management of the Firm)

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Abstract

The subject of this research is the performance of stocks on the Bulgarian Stock Exchange (BSE). The main issue of interest is whether the index price levels are supported by fundamentals or if there is a bubble or undervaluation on the BG stock market. The purpose of this research is to explore the true level of indexes at the BSE, as dictated by fundamentals, and compare it with actual index levels. The research method is based on the comparative analysis of price-earnings ratios (PEs) and price-to-book ratios (PBVs) of the index during the analyzed period. The 2024 PE and PBV of the index are compared with fundamental PE and PBV ratios of the BGBX 40 index, which are derived from the fundamentals, determining the value of stocks in the index. The actual PE and PBV ratios of BGBX 40 look rather low compared with the ones in the leading developed stock markets. At the same time, however, the results of this analysis show that these current PE and PBV ratios are much higher than the benchmark values of the fundamental PE and PBV ratios. In this regard, the current price levels of stocks at the Bulgarian Stock Exchange in 2024 do not seem supported by fundamentals.

Keywords:

stock markets; actual PE and PBV ratios; fundamentals; fundamental PE and PBV ratios; BGBX 40 price levels

1. Introduction

As it is well known that the stock market avails long-term capital to the listed firms by pooling funds from different investors, allows them to expand in business, and offers investors alternative investment avenues to put their surplus funds in, investors carefully watch the performance of stock markets by observing the composite market index before investing funds (Naik 2013). The stock market has become an essential factor, playing vital roles in economic prosperity by fostering capital formation and sustaining economic growth in most economies across the world (Udegbunam and Eriki 2001). Stock market prices are among the main indicators monitored by economists, politicians, analysts, and investors to determine how capital markets and companies in these markets are performing, as well as in relation to making investment decisions and other decisions (Vasileva 2021).

The factors that determine stock prices in capital markets are many and diverse; hence, researchers in the academic fields of accounting and finance intermittently undertake to track them with contextual emphasis. From the philosophical basics to the more rigorous econometric dispositions, analysts in different schools of thought had ventured in this regard and came up with divergent outcomes (Agundu et al. 2018).

An important question that normally excites investors, analysts, investment bankers, and everyone else interested in stock markets at any time is whether the stock market is most likely to go up or down in the near and the more distant future. Even in the cases when investors or analysts are only interested in a particular stock, they still care about the movements of the market as a whole. The reason for this is very simple: when the market goes up, it pulls up the prices of not only the best stocks, but also the weak ones. When the market goes down, it pulls down not only the poor stocks, but also the stocks of the best performing companies (Damodaran 2012).

The prevailing majority of commentaries, forecasts, and published analyses that flood the investor community focus on potential short-term moves, resulting from short-term factors, such as central bank actions, changes in interest rates, new reports on employment levels, the latest data on inflation rates, political events, etc. The question of whether the current stock market is undervalued, fairly valued, or overvalued is more rarely asked and remains in the background. In most of the above commentaries, forecasts, and analyses regarding potential immediate moves, it is implicitly assumed that the starting point is an adequately valued market. However, this has been under question for much of the time during this century and requires regular in-depth analyses regarding the true level of the market at any time. The perceptions about the Bulgarian stock market do not seem to be an exception in this respect.

According to Nobel laureate Robert Shiller, the Global Financial Crisis of 2007–2009 once again reminded us of the need for a qualitative analysis of stocks and their price levels, both for the individual investor and for the better functioning of markets (Shiller 2012, 2015). The research of the fundamentals that dictate the value of stocks on the Bulgarian stock market and in the economy is very important at this stage and is the focus of this study.

This topic is most closely related to capital market finance. At the same time, it is quite relevant to the field of financial management of companies, including the valuation of stocks and investing in stocks, analysis of the market performance of company’s own stocks, etc.

The need for this study is dictated by the fact that there is a certain gap in academic research related to the true value of the stock market indexes. It is surprising how limited the studies are on this topic. This was found by the authors of this paper during previous studies in the same field.

The approach that is applied by the current study seems seriously minimized in the academic literature. One of the reasons for starting this research is to provoke interest and potential discussions. This research paper is a kind of initial study on these matters, which is supposed to continue on a broader scale and with a more sophisticated instrumentarium.

The Bulgarian stock market was chosen for analysis because it is one of the developing markets, which has a very short, but curious history. There was a huge bubble before the Global Financial Crisis, after the burst of which the major index lost almost 87% of its market capitalization, as compared with the record-high pre-crisis levels of 2007. The stock indexes today—17 years later—are still far below these pre-crisis levels. The Bulgarian Stock Exchange—Sofia (BSE-Sofia)—practically represents the organized stock market in Bulgaria. The authors of the current study have previous analyses on the financial performance of the enterprises and stocks in the country.

The derivation of fundamental PE and PBV ratios is actually a hidden, transformed and concise application of DCF valuation, based entirely on fundamental analysis. With this in mind, this research has a certain practical contribution for investors, fund managers, and other decision makers in the field of stock analysis, valuation, and selection.

The next sections of this paper include the following: presentation of the Purpose and Methods of research, the Literature Review, Theoretical Framework and Hypotheses, Empirical Analysis, Results and Discussion, Conclusion, and Future Research.

2. Purpose and Methods

The Purpose of this research is to explore the true level of indexes at the Bulgarian Stock Exchange-Sofia (BSE), as dictated by fundamentals, and compare it with actual index levels. The object of this study is the level and dynamics of major indexes on the Bulgarian stock market. The subject of this research is the fundamental value of the BGBX 40 index at the BSE-Sofia and how it copes with the actual price level of the index.

The fundamental of this study is the so-called theoretical or fundamental price-to-earning and price-to-book ratios, discussed by Damodaran (Damodaran 2012) and by Copeland, Murrin, and Koller (Copeland et al. 2000). They are proposed to use in this analysis and the valuation of individual stocks and are an elegant way to align relative valuation with DCF valuation. These fundamental ratios can be even more useful for the analysis of the market as a whole, which is used in the current study.

For the purpose of this study, fundamental indicators are explored, such as the following: return on equity (ROE), growth (g) of earnings per share (EPS), and cost of equity (R_E). The dynamics of the leading indexes of the Bulgarian Stock Exchange—SOFIX and BGBX 40—are tracked for the entire periods of their existence. The nature of this research also requires the involvement of price–earnings (PEs) and price-to-book (PBV) ratios, since they provide the needed comparability internationally—with other markets and indexes. The factors that lead to probable short-term moves of the stock market are not included in this research.

The research goal will be achieved through the application of a combination of research methods and approaches, and the hypotheses will be tested based on the results obtained. The most used methods in this study are comparative and historical analyses and modelling. The authors will use primary quantitative data to test the hypotheses. The scientific study carried out is a mix of descriptive and experimental research.

3. Literature Review, Theoretical Framework, and Hypotheses

3.1. Fundamentals as Determinants of Stock Index Levels

A similar study with the topic “Dynamics of Macroeconomic Fundamentals Affecting Stock Market in India: A Causal Relationship Analysis” was conducted by B. Venkatraja (2016), which investigates the relationship between the Indian stock market (BSE Sensex) and five macroeconomic variables, namely, the index of industrial production, the wholesale price index, gold price, foreign institutional investments, and the real effective exchange rate using monthly data. Another study, which is closer to the approach and logic of the current study, was conducted by Goedhart, Koller, and Wessels. They also focus on the relationship between the stock market and fundamentals, and especially on intrinsic value, as well as on PE ratios of the S&P 500 from different key sub-periods (Goedhart et al. 2005).

In the current study, the focus is on fundamentals that are most directly related to the value of companies and their common stocks. Many of the participants in the stock market do not care much about the intrinsic value of stocks and of the market as a whole. This study, however, is oriented mainly to market players that share the point of view of real, long-term investors. The term “investors” in this case is restricted to those participants in the stock market who meet the definition of Benjamin Graham and David Dodd from 1934. They use the term “investor” as opposed to the term “speculator” (Graham and Dodd 2009). According to them, “the investment is an operation in which, on the basis of a comprehensive and in-depth analysis, the preservation of the principal is guaranteed, and an adequate return is realized. Operations that do not meet these requirements are speculative” (Graham 2006; Moris 2009). The in-depth analysis of the respective financial asset, which the authors have in mind, is essentially dedicated to determining its intrinsic value.

In principle, stock prices are supposed to reflect the intrinsic value of stocks. However, prices of stocks quite often differ from their intrinsic value. According to Benjamin Graham and Warren Buffett, “Price is what you pay, value is what you get” (Graham 2006; Moris 2009). The first—the price (of acquisition)—should be perceived as an investment expense (investment cost) of the acquisition project, and the second should be perceived as the value of the acquired assets. The major problem with determining value comes from the fact that it is hidden and invisible (Nenkov and Hristozov 2022).

According to James Hitchner, intrinsic value is based on the fundamental analysis of companies, especially public ones. This is the value most often taught in finance courses and is the basis of finance textbooks. Intrinsic value is also defined as the “true” or “actual” value, which is calculated based on the available facts. It is often called a “fundamental” value. It is actually an analytical judgement of value that is based on the inherent characteristics of the investment in question (rather than its characteristics according to a particular investor). According to Hitchner, intrinsic value is not often applied to private companies (Hitchner 2017).

Aswath Damodaran, for his part, asks a very logical question in relation to the valuation of companies and shares: “What are we looking for—the price or the value?” (Are we pricing or valuing?) (Damodaran 2020). It seems that the majority of investors, analysts, and appraisers are not clear on this issue. And from this arises the majority of the problems in valuation, as well as the subsequent disputes. Damodaran raises this question primarily in the context of the behaviour of various players who buy and sell shares in the capital markets (Nenkov and Hristozov 2023).

Damodaran draws a clear line between price and value, although he believes that the two terms are used interchangeably in both academia and practice (Damodaran 2020). In the stock market, price on the one hand, and value, on the other, are dictated by very different driving forces. The drivers of value are as follows: cash flow, growth, and risk. Discounted cash flow models are most commonly used to apply the above fundamental variables, but there are also other ways to arrive at intrinsic value (Damodaran 2019).

The forces determining stock prices are two: simpler, but more powerful—demand and supply. While rational investors may use only the fundamental variables in determining supply and demand, at the same time, these fundamentals are drowned out in the market by the influence of sentiment and momentum. Markets are price-creating mechanisms, not value-creating mechanisms (Graham and Dodd 2009). In this spirit, Benjamin Graham also calls them “voting machines”, but not machines for determining the “weight” of the respective shares (Graham 2006).

Damodaran’s above question is important not only in relation to the motives and actions of the two main groups of buyers of shares in the market—traders and investors. It is also completely up to date in the context of the work of analysts and appraisers, in the process of valuing the shares of public and non-public enterprises and businesses. In most valuations, they are not quite clear whether they are looking for intrinsic value or are more interested in arriving at a result close to market price. Valuation standards sometimes, instead of helping in this regard, make things even more confusing. For example, in many situations, the choice of an appropriate standard of value is dictated by the circumstances, the intended use of the appraisal, the contract, the requirements of the law, or other factors. In other situations, the choice of the standard of value may be clear, but the meaning of that standard is not particularly clear (Nenkov and Hristozov 2023).

According to Burton Malkiel, at the end, it always turns out that the market is right (Malkiel 2015), but this does not change the fact that actual stock prices and indexes are often different from the intrinsic, fundamental values of stocks. Stock market history indicates that these discrepancies are often significant and may continue for relatively long periods. It is no surprise that Henry Blodget outlines “excessive stock prices compared to fundamentals” as the first of five major indicators for the existence of a price bubble on the stock market (Blodget 2011). This is why it is important to regularly explore the fundamental value of the market and compare it with actual price levels.

3.2. Using Market Ratios to Analyze the Level and Dynamics of Stock-Market Indexes at the BSE-Sofia

The indexes are rough averages of actual prices of stocks (in the respective currency) included in them, and these averages are price weighted, or market weighted, with needed adjustments to ensure continuity. They represent the stock market levels in absolute terms. They are convenient for analysis and comparison in historical aspect, in terms of their dynamics over the years, including percentage increase or decrease. However, they cannot be compared directly with the values of indexes of other stock markets, because of difference in the scale.

The serious analysis of a certain stock market should also include, among other aspects, comparison with other markets. This requires the involvement of indicators, which allow for comparability among different indexes and markets. The appropriate indicators for this purpose are the so-called market ratios (or market multipliers): price–earnings, price-to-book value, price-to-sales, enterprise value-to-sales, enterprise value-to-EBITDA, etc. According to Burton Malkiel, market multipliers (such as the price–earnings ratio, PE) provide a good yardstick for comparing different stocks that have different prices and different earnings per share in absolute terms (Malkiel 2015).

Market ratios (or market–value ratios), also called market performance indicators, are one of several important sets of ratios for financial analysis of public companies (Brigham and Gapenski 1994), (Hristozov 2020). What sets them apart as a group is that, in the numerator of each of them, is the market price per share (P₀) or, alternatively, the enterprise value (EV), or the firm value (FV) of the company. This specificity of the market ratios allows for their use in several different directions (Nenkov 2021):

-: In the analysis of the financial performance of the respective companies whose stocks are traded on the capital market;
-: In the analysis of the stock market as a whole, of different sectors, including for comparison between markets and sectors;
-: In relative valuation methods, for valuing other companies (multiples approach or peer companies approach).

An important advantage of market ratios is that they provide comparability for the needs of comparative analysis, both among different companies, sectors and markets, and in a dynamic aspect—among different historical periods. This is due to the fact that market ratios are a kind of “standardized” share prices, or prices on a common basis (Damodaran 2012). One of the problems with market ratio research is that relatively little is written about it. According to Emanuel Bagna and Enrico Ramusino, “market multipliers are used more than they are studied. Stock analysts, investment bankers, and other practitioners make extensive use of market multipliers to determine the value of companies. However, the literature on multipliers is not as rich as the widespread use of these assessment tools in practice suggests” (Bagna and Ramusino 2017).

According to Damodaran, market ratios are used to primarily determine the market price, not the intrinsic (fundamental) value (Damodaran 2012). Thus, comparative evaluation methods seem to be far from fundamental analysis. Comparative valuation methods are particularly desirable for use in long-term bullish markets, where optimism has gripped almost all market participants, prices are inflated and continue to rise. In such conditions, the reason for the preferences for comparative methods are not only their advantages, but also their disadvantages. These methods are particularly convenient for “justifying” apparently inflated stock market prices during upside markets (Nenkov 2017).

With regard to the above, it is logical to ask how market ratios (multipliers) comply with fundamental analysis since this analysis is related mainly to the models of discounted future cash flows. The use of relative valuation methods, based on these same market ratios, has traditionally been considered as an alternative to DCF models, i.e., an alternative to fundamental analysis. The truth is, however, that, since market ratios are standardized forms of stock prices, they should also have a fundamental value. In other words, they could also be expressed as a function of the three fundamental variables: the earnings potential, the expected earnings growth and the level of risk (Damodaran 2012). The only essential difference with DCF valuation is that, under DCF models, the visions and expectations about these three fundamentals are discussed explicitly, while, in relative (multiples) valuation, they are included implicitly. Thus, Burton Malkiel clearly links fundamental stock valuation analysis to the use of the PE market ratio (Malkiel 2015).

A study conducted by Bancel and Mittoo among 356 European experts in company valuation, with the CFA certificate or its professional equivalent, indicates that the most popular for them are the relative valuation methods (market multiples methods). About 80% use them, followed by the DCF enterprise valuation model, preferred by about 79% (Bancel and Mittoo 2014). Pinto, Robinson, and Stowe conducted a survey of stock valuation practices by professional financial analysts who are members of the CFA Institute. According to this research, when valuing individual stocks, 92.8% of analysts use market multiples, and 78.8% use discounted cash flow (DCF) models (Pinto et al. 2018). Similar preferences are reported by other authors.

Bancel and Mittoo also study the popularity and use of the different market multiples (ratios) (Bancel and Mittoo 2014). This is illustrated in Figure 1.

The figure illustrates that the most widely used is the firm value/EBITDA ratio. It is relied on by 83% of appraisers who use several ratios (multipliers) and by 70% of appraisers who use only one ratio (multiplier). The second most trusted is the price–earnings (P/E) multiple, used by 68% of respondents. The price-to-book value (P/BV), enterprise value/EBIT and enterprise value/sales ratios are used by about 45% of experts each (Bancel and Mittoo 2014).

The price–earnings ratio (PE) is not only the second most popular market ratio used to analyze stocks and make investor decisions. It is also the oldest one. This ratio is a very convenient tool for analysis at the market level (index level), given the sufficient, regularly published data regarding share prices and earnings per share (EPS). Besides this, the PE shows one of the most direct relationships of interest to investors: the relationship between the price they pay per share of stock and the income that this share brings. For this reason, James O’Shaughnessy says that “The PE ratio per share is the most widely used measure of how cheap or how expensive a stock is compared to other stocks (O’Shaughnessy 2005). The price-to-book value ratio (PBV) is another important market multiple at the equity level, which can be a useful addition to the PE. It partly compensates for one of the deficits of the PE—the counter movement principle, encountered by Nicholas Molodovski (Molodovsky 1995). There is a direct logical connection between the PE and PBV—the PBV ratio is actually the product between the PE and ROE (Stickney 1996), i.e.,

P B V = P E \times R O E

. In other words, the PBV ratio also represents a direct relationship between the price per share and the fundamental variable earnings potential—in absolute terms (EPS) and in relative terms (relative to equity—ROE) (Nenkov 2021).

3.3. Hypotheses

On the basis of the literature review and previous studies conducted by the authors in the field, and in connection with the realization of the set objective of this research, the following working hypotheses are formulated:

Hypothesis 1.

The fundamental, intrinsic value of stock indexes of the BSE-Sofia can be derived at any point in time, expressed as fundamental PE and PBV ratios, to be used as a reliable benchmark for the true index levels.

Hypothesis 2.

The actual PE and PBV ratios at the BSE-Sofia are most likely significantly higher than the fundamental levels of the PE and PBV.

4. Empirical Analysis

4.1. Analysis of the Price Dynamics on the Bulgarian Stock Exchange-Sofia

The stock index chosen for the purpose of this analysis is the BGBX. The main reason to choose it is that, with its 40 constituent companies, it is the broadest index on the Bulgarian Stock Exchange-Sofia (BSE) and is supposed to be a good representation of the Bulgarian stock market.

The BGBX 40 is a sort of successor to the earlier BG 40 index, which was started at the beginning of 2005. At the end of 2013, the BSE-Sofia ceased the calculation of the index BG 40 as a price-weighted index, and, as of 2 January 2014 it launched the BGBX 40 index, based on free-float weighted market capitalization. Its constituents at the start were the BG 40 constituent companies as of 30 December 2013, and its starting value was 100 points. BGBX 40 covers 40 issues of common shares of the companies with the greatest number of transactions and the highest median value of the daily turnover during the last six months as the two criteria have equal weight. The maximum weight of an economic group shall not exceed 25% as no more than four issues shall belong to one economic group.

The interruption of the broad BG 40 index at the end of 2013 and the launch of a new broad index BGBX 40 with the beginning of 2014, starting at 100, makes it complicated to achieve an adequate picture of the dynamics for the whole period, from the beginning of this century until 2024. This is why it is also useful to take a short look at the leading index on the BSE-Sofia—SOFIX. It was launched in 2001, and its calculation continues until present day, providing the complete picture about the moves of the Bulgarian stock market during this century. Figure 2 illustrates the dynamics of SOFIX from 1 October 2001 until 1 August 2024. The huge fluctuations of the Bulgarian stock market before and during the Global Financial Crisis are depicted very well on this chart. They were mainly the result of the huge price bubble of 2007–2008. After the burst of the Global Financial Crisis, the bottom was hit during the first quarter of 2009. The moves of BG 40—the predecessor of BGBX 40—were similar during this crucial period.

During the period preceding the Global Financial Crisis, the prevailing opinion of local analysts was that stocks on the Bulgarian stock market were undervalued, since market ratios (primarily PE) of BSE-Sofia were significantly lower than market ratios in the developed stock markets. The fact that the market ratios on these developed markets were inflated and abnormally high was not explicitly discussed. As a result, the prices of stocks on the BSE-Sofia went too high, leading to PEs that were even higher than those in the developed stock markets in October 2007.

Figure 3 illustrates the dynamics of the BGBX 40 for the period 2 January 2014–1 August 2024, by months (with values on the first day of each month). After its start on 2 January 2014, the BGBX 40 index moved sharply up to 122.17 points, but this was followed by a continuous steady decline. During the period May 2015–September 2016, it stayed below 100 points, with a lowest value of 87.81 (on 1 May 2016). This period was followed by another impressive rise up to 138.23 on 1 January 2018. Another continuous period of decline brought down the index again below 100 points—during the COVID pandemic in 2020. Since then, the BGBX 40 has marked a steady increase, without any dramatic fluctuations, ending at 169.97 points on 1 August 2024.

Table 1 shows data on BGBX 40 companies as of 15 August 2024, including the following: market capitalization, daily trading volume of shares, PE and PBV ratios. Companies vary significantly by market capitalization—from 6,450,000 BGN for the smallest (Billboard AD) to 1,025,188,033 BGN for the largest (Sopharma AD). The average company market capitalization is 190,570,386 BGN. The average trading volume of shares per day is very low—6076 BGN.

The PE and PBV ratios of the companies in the index vary significantly from company to company. The lowest published PE is 2.57 (Doverie United Holding AD), and the highest is 2372.19 (Investment Company Galata AD). The lowest published PBV ratio is 0.08 (for Synergon Holding AD), and the highest is 44.17 (Sopharma Buildings REIT). The PEs for 10 companies are not published. The usual reason for this is the negative values of EPS.

The average (mean) PE for the BGBX 40 as of 15 August 2024, calculated on the basis of all published company PEs, is 141.31, and the median PE is 11.75. The average PBV is 3.66, and the median PBV is 1.49. The mean (arithmetic average) PEs and PBVs are susceptible to upward bias—partly due to the presence of extremely high PEs and PBVs of individual stocks in the database, partly due to the fact that negative PEs are not published. These extremely high values (outliers) are mainly due to the fact that market ratios (multiples) are not constrained on the upper end. Especially for the PE, extremely high values are obtained when current profits are close to zero (the counter movement principle of Molodovski (Molodovsky 1995). These outliers lead to distorted averages that are not representative for the sample (Damodaran 2012) and have to be eliminated. For this reason, the database is adjusted in this case, by giving a value of 100 for individual PEs, higher than 100, and by giving a value of 10 for individual PBVs, higher than 10. The calculated mean PEs and PBVs from such an adjusted database are much more representative. The calculated adjusted mean PE for the BGBX 40 as of 15 August 2024, is 23.14, and the mean adjusted PBV is 2.04. These adjusted mean PE and PBV are the relevant actual PE and PBV of BGBX 40. The adjusted median PE is again 11.75, and the adjusted median PBV is again 1.49. The median is rather neutral to the distorting effect of outliers, and, in many cases, it is recommended to use the median instead of the mean.

Table 2 shows the aggregate earnings yield, the aggregate PE, and the aggregate PBV of BGBX 40. These are actually weighted average values of the three indicators. For the purpose of this research, the total market capitalization of the BGBX 40 as of 15 August 2024 is used, together with the aggregate net profit and the aggregate equity for 2023 of the companies included in BGBX 40. The net profits and equity by companies are taken from their annual financial statements for 2023. In order to obtain the weighted average earnings yield, we divide the aggregate net profit by the total market capitalization. The yield is 7.02%. The weighted average PE is 14.25 and is obtained by dividing the total market capitalization by the aggregate profit. The weighted average PBV is 0.86 and is obtained by dividing the total market capitalization by the aggregate equity. The financial statements of a few companies for 2023 are not available, but, still, the obtained indicators could be accepted as representative enough for the index as a whole.

Against the background of PE and PBV ratios in other (mainly developed) markets, the above calculated mean, median, and weighted average PE and PBV of the BGBX 40 look relatively low.

4.2. Analysis of Return and Growth Fundamental Indicators for Five Major Non-Financial Sectors in Bulgaria

As outlined in Section 3, the value of the stock is a function of three fundamental variables (Damodaran 2012):

-: The earnings potential (cash flow potential);
-: The expected growth of earnings (cash flows);
-: The level of risk.

The market multiples PE and PBV, being standardized prices of stocks, are also a function of these three fundamentals. At the equity level, the appropriate indicators of these three fundamentals are, respectively, as follows (Nenkov and Bathala 2008):

-: Return on equity (ROE)—the synthesized expression of the earning potential (per 100 units of equity invested);
-: Expected growth rate (g) of earnings per share (EPS);
-: The cost of equity (R_E)—expressing the level of risk of the respective stock.

For the analysis of return and growth fundamental indicators, in this study, we start with a broad database for all non-financial corporations (NFCs) in Bulgaria. It is expected to give a good idea about the aggregate ROE and growth prospects of the economy. The database is prepared annually by the National Institute of Statistics (NIS) of the country. The database itself includes the annual aggregate Comprehensive Income Statements and the aggregate Balance Sheets (Statements of Financial Position) by sectors of non-financial corporations in Bulgaria, for the period 2008–2022. In this database, all non-financial enterprises in the country are grouped in 17 sectors—from A to S (not including K and O, which are financial). In this specific case, the focus is on the five largest sectors in terms of revenue and number of enterprises. These sectors are as follows:

C.: Manufacturing Industry;
D.: Energy;
F.: Construction;
G.: Trade; Repair of Motor Vehicles, and Motorcycles;
H.: Transport, Warehousing, and Postal Services.

Figure 4 illustrates the levels of the aggregate ROEs by sectors, which have been calculated from the aggregate annual financial statements in the above database, for the period 2008 through 2022. The five sectors account for 84% of revenues of all seventeen sectors, and the ROEs derived above can be accepted as representative enough for the economy as a whole. The ROE varies significantly by sector and by year. The average ROEs for the whole period are as follows: sector G—19.1%, sector C—14.4%, sector D—9.7%, sector F—22.0%, and sector H—10.4%. The total average for the period is 15.11%.

Since the aggregate EPS is not available in the database, the aggregate net profit for the five sectors can be used as an approximate indicator for the dynamics of earnings. The geometric average growth rate (CAGR) of net profit for this 15-year period is 7.64%.

4.3. Analysis of Return and Growth Indicators for the BGBX 40 Companies

Table 3 shows summarized values for the return on equity (ROE) of BGBX 40 companies for the period 2019–2023. They are calculated from the relevant data for 39 companies in the index (the data for the 40th company—Billboard AD—is not available in the database). The arithmetic average for the whole period is 12.69%, ranging by years between 7.86% and 16.73%. The weighted average (based on aggregate net profit and aggregate equity of the 39 companies) is significantly lower—6.57%. Almost the same is the median of 6.54%. At the same time, the Infostock reported average ROE for BGBX 40, as of 15 August 2024, is 8.77%.

The most recommended approach to determining the expected growth rate (g) is the so called internal growth rate. It is determined as the product of the ROE and the retention (plowback) ratio (b) of the respective stock. In this case, we can use it for the index as a whole. The Infostock reported dividend payout ratio (1 − b) for the BGBX 40 is 0.51, and the reported retention ratio (b) is 0.49.

To determine the internal growth rate, we have to choose the ROE that is the most representative for the index. If we choose the weighted average of 6.57%, the internal growth rate is as follows:

g = R O E \times b = 6.57 % \times 0.49 = 3.22 %

If we decide to use the mean ROE of 12.69%, the internal growth rate is as follows:

g = R O E \times b = 12.69 % \times 0.49 = 6.22 %

If we decide to use the Infostock reported ROE of 8.77%, the internal growth rate is as follows:

g = R O E \times b = 8.77 % \times 0.49 = 4.30 %

4.4. Derivation of Fundamental PEs and PBVs for BGBX 40

The focus in this section is on the framework, the models for determining the fundamental PE and PBV of the BGBX 40, and on the specifics of each of the input variables. Both one-stage and two-stage models can be applied. The one-stage model is not precise and can be somewhat misleading in certain cases. However, it is more intuitive and convenient for understanding the logic behind the levels of different ratios in the market. The two-stage model is more precise and provides results closer to the true fundamental values of PE and PBV ratios.

In this study, it is sufficient to demonstrate only the one-stage models. The main reason for this is that the focus is on input variables that are close to typical, average values. Under these input values, no major differences in growth rates over time are expected. The one-stage model is good enough for such cases. The one-stage model for deriving the fundamental PE is as follows (Damodaran 2012):

P E = \frac{(1 + g) \times (1 - b)}{R_{E} - g} = \frac{(1 + g) \times (1 - g / R O E)}{R_{E} - g}

(1)

where

PE—fundamental price–earnings ratio;

ROE—return on equity;

g—expected growth rate of earnings per share (EPS growth);

b—plowback (retention) ratio;

R_E—cost of equity.

Fundamental ratios for the BGBX 40 index are calculated below, based on the characteristic values of the fundamental variables discussed in previous sections. The current fundamental PE is used, which should ensure comparability with current and trailing actual PEs.

For the application of one-stage models, the following input variables are needed: return on equity (ROE), expected growth rate (g), eventually retention ratio (b), and cost of equity (R_E). Different values of the ROE were discussed in previous sections, and the most representative for the BGBX 40 shall be used. The weighted average ROE of 6.57% seems to meet this requirement. It is almost equal to the median and also complies with this market weighted index. The internal growth rate, corresponding to this ROE, is 3.22%. However, in this case, the more optimistic ROE of 12.69% will be used, in order to check the potential upper boundaries of fundamental PEs and PBVs. This ROE is also much closer to the average ROE of 15.11% obtained for the five major sectors for the period 2008–2022. The corresponding internal growth rate (g) is 6.22% (12.69% × 0.49).

The third parameter—the cost of equity—was not discussed in the previous sections. This is always a debatable variable in stock valuation. The in-depth theoretical and empirical analysis of this important fundamental is not the subject of the current study. One approach for the derivation of the cost of equity for the Bulgarian stock market is simply demonstrated. It takes into account the fact that the Bulgarian capital market is a developing one. The approach involves the capital asset pricing model (CAPM) to determine the cost of equity in a mature stock market (in this case, the US market). A country risk premium is added for Bulgaria, plus a specific risk premium for the relatively smaller size of companies in Bulgaria. The country risk premium itself is a function of the spread on BG government bonds and a multiplier, equal to the ratio between the standard deviation of stocks and the standard deviation of bonds on emerging markets. Data are taken from the website of Prof. Damodaran and from the 2018 Ibbotson Risk Premia Over Time Report. The long-term geometric average for the risk-free rate and for the equity risk premium are used—4.57% and 5.23%, respectively. Beta for the market is equal to 1. The spread on BG bonds at the start of 2024 is 1.74%, and the multiplier is 1.34. Given the average market capitalization of the BGBX 40 companies, a corresponding size premium of 3 to 4% would be appropriate (3% used in this case).

Thus, the cost of equity (R_E) for the average public enterprise in Bulgaria in 2024 is equal to the following:

\begin{array}{l} R_{E} = Risk free rate (USA) . \\ + Beta \times Equity risk premium (mature market (USA)) . \\ + Spread on BG government bonds \times Multiplier . \\ + Specific premium for the smaller size of companies in Bulgaria . \\ = 4.57 % + 1.0 \times (5.23 %) + 1.74 % \times 1.34 + 3.00 % = 9.80 % + 2.33 % + 3.00 % . \\ = 15.13 % . \end{array}

Given the above, the starting input parameters for applying the one-stage model for obtaining fundamental PE for BGBX 40 are as follows:

-: Return on equity (ROE) = 12.69%;
-: EPS growth rate (g) = 6.22%;
-: Retention ratio (b) = 0.49;
-: Cost of equity (R_E) = 15.13%.

The electronic model makes it possible to try many variations and combinations between the key input variables. The output of the model is illustrated in Table 4. There are some very high values, and some negative values, both of which have no economic sense and should be ignored. They are due to unrealistic combinations between the input variables and to some drawbacks of the one-stage model, which will not be discussed in detail in the current study. The most important, however, is that the values closer to the centre of the table have economic sense and are quite representative.

The initial obtained fundamental PE, at the ROE of 12.69% and the cost of equity of 15.11%, has a value of only 6.08. Table 4 illustrates a variety of combinations between the ROE and the cost of equity (R_E). One reason to observe different possible combinations is that none of the input variables is uncontested. From the discussions above, it became evident that the representativeness of each of them is subject to doubts. Different analysts stand behind different assumptions and different input values. From the combinations in Table 4, it becomes clear that the actual median PE of 11.75 can match its fundamental twin under the combination of ROE = 15.2% and R_E = 12.1%. There are, of course, many other possible combinations leading to a similar fundamental ratio, but this is one of the combinations presented in Table 4. The adjusted actual mean PE of 23.14 could be approximately matched by the fundamental PE under a combination of ROE = 16.5% and R_E = 10.6%, again visible in Table 4. The problem is that these combinations are not quite realistic, since they are not sustainable in the long term. Under the one-stage model, the assumptions are that each of the input variables will keep its value until infinity. At the same time, in a market economy, given the free movement of capital, the return on equity and cost of equity should overlap on average in the long run. This is another reason why the optimistic ROE of 12.69% was preferred as an input variable—it is much closer to the used cost of equity. This would mean that one sustainable combination in Table 4 is ROE = 15.2% and R_E = 15.1%, which makes a fundamental PE of 7.1.

It becomes clear from Table 4 that, excluding the outliers, the obtained fundamental PEs are with predominantly low values. The major reason for the low values of the fundamental PEs is the relatively high cost of equity, due to the country risk premium and the small-size premium for Bulgaria. For companies with no growth in EPS, and, for the average company, which earns exactly the cost of equity (t.e. ROE = R_E), the fundamental forward PE is reciprocal to the cost of equity. At a cost of equity of 15.13%, provided that the ROE is also 15.13%, the fundamental forward PE would be 6.61 (the fundamental current PE is slightly different—7.1).

The model for determining the fundamental PBV ratio is as follows (Damodaran 2012):

P B V = \frac{R O E \times (1 + g) \times (1 - b)}{R_{E} - g} = \frac{(R O E - g) \times (1 + g)}{R_{E} - g}

(2)

where

PBV—fundamental price-to-book value ratio;

ROE—return on equity;

g—expected growth rate of earnings per share (EPS growth);

b—plowback (retention) ratio;

R_E—cost of equity.

Table 5 shows the results from applying the model for determining the fundamental PBV ratios of BGBX 40. The obtained fundamental PBV at the selected input parameters is 0.77. It is seen from Table 5 that the levels of the fundamental PBV gravitate around one. For the average company, which earns exactly the cost of equity (with ROE = R_E), the fundamental PBV should be equal to one. The ratio which is very close to this, is 1.09, at a combination of ROE = 15.2% and R_E = 15.13%. It is a little bit above one mainly because of the version of the model that is used in this case, with the multiplier (1 + g). This is a kind of a current fundamental PBV, (with ROE = EPS₀/Equity₀). The companion variable for the PBV ratio is the ROE, which means that the ROE is the variable with the highest influence over the PBV. In our case, the ROE is lower than the cost of equity, and this is why the fundamental PBV is lower than one.

5. Results and Discussion

The initial obtained fundamental PE is 6.08. This is a very modest value as compared with each of the actual average PEs for the BGBX 40 as of 15 August 2024, discussed in Section 4.1: the actual adjusted mean PE is 23.14, the adjusted median PE is 11.75, and the weighted average is 14.25. At the background of the fundamental PE, the actual market PEs of the index seem significantly overpriced, as shown in Table 6:

The mean actual PE exceeds the fundamental PE by 280.59%, the median actual PE exceeds the fundamental PE by 93.26%, and the weighted average PE—by 134.38%. This is an indicator for inflated actual PEs of the BGBX 40 and sufficient overpricing of the index.

In Section 4.1, the determined actual PBV ratios for the BGBX 40 are as follows: the adjusted mean PBV is 2.04, the adjusted median PBV is 1.49, and the weighted average PBV is 0.86. The fundamental PBV ratio for the index is much lower, especially compared with the first two actual multiples (Table 7). The mean PBV exceeds the fundamental PBV by 164.94%, the median PBV exceeds it by 93.51%, and the weighted average PBV—by 11.69%. If we accept that the median or the mean actual PBV is representative for the level of the BGBX 40, then the index is significantly overpriced. Only the weighted average PBV is close to the fundamental PBV.

The above obtained results are subject to discussion in principle, no matter which stock market is concerned. A significant part of it was practically held in Section 4, in the context of commenting and analyzing the outcomes of the two fundamental models used. The electronic models used provide excellent opportunity for displaying and discussing combinations under different assumptions and scenarios.

The discussion normally involves different aspects, starting with the representativeness of the average actual market ratios, and continuing with the values of each of the input fundamental variables. The main reason is that there are varying opinions with regard to the true level of fundamentals. The supporters of the so called “new normality” claim that the 21st century PE, PBV, and other market ratios should be significantly higher than historic average levels, because of the prevalence of new modern businesses, with much higher productivity, growth perspectives, etc. At the same time, serious arguments in support of these claims are not presented. This type of discussions is predominantly “off the record”, and not widespread in the academic literature. The discussions, if any, are mainly within the context of private analyses, related to the business of stock market investments, or informal among different experts.

6. Conclusions and Future Research

Within the current research paper, the level of indexes at the Bulgarian Stock Exchange-Sofia is explored. The subject of this research is the fundamental value of the BGBX 40 index at BSE-Sofia. The main question is whether the actual price level, expressed as PE and PBV ratios, is equal, higher, or lower than the intrinsic value of the index. The approach of the research steps on fundamental models successfully combined the logic of relative valuation with DCF valuation.

The current levels of the BGBX 40 index in the middle of 2024 are analyzed with the help of market multipliers PE and PBV. For this purpose, the current actual average ratios of the index were estimated. These average PE and PBV levels look quite modest as compared with market ratios in the leading developed stock markets.

Fundamentals standing behind the prices of stocks and behind the PE and PBV ratios at the BSE-Sofia were reviewed and analyzed. On the basis of this review and analysis, well-justified projections for the ROE, the growth rate of EPS (g), and the cost of equity (R_E) were made, and reliable fundamental PE and PBV ratios were estimated. Regardless of the usually contested values of the above input variables, the fundamental PE and PBV ratios can indeed serve as the benchmarks for what the normal level of actual PEs and PBVs should be. The process and the model provide the opportunity to discuss the reasonability of each input fundamental variable and to fine tune the estimated fundamental PE and PBV levels. If not about the specific number, a consensus can be reached about the most likely range of potential values for the two fundamental ratios.

The first impression is that the determined fundamental PE and PBV look abnormally low, against the background of both international and BSE-Sofia actual PEs and PBVs. The in-depth analysis, however, indicates that there is nothing abnormal. There is a serious reason for the low fundamental PE and PBV of the BGBX 40, and it is that fundamental ratios are very sensitive to the cost of equity. The cost of equity in Bulgaria as a developing stock market is significantly higher than the one on large and developed markets, due to the additional risk premiums. At the same time, the fundamental PE and PBV are negatively correlated with the cost of equity. The methodology and the results of this study have practical implications for interested managers, investors, analysts, and others. The comparison between the actual PE and PBV of the BGBX 40 on one hand, and the fundamental PE and PBV on the other hand, indicate that the actual ratios significantly exceed the fundamental ratios. Shortly, actual PEs and PBVs of the BGBX 40 are not supported by fundamentals. Since fundamental ratios indicate the price at which stocks should be traded, then the conclusion is that the BGBX 40 index is significantly overpriced.

The current study is limited to initially exploring and approbating the fundamental PE and PBV models on the basis of data for the Bulgarian stock market and outlining the open issues for further studies. The need and prospects for future research of these issues are determined by the fact that the results of such studies are always subject to debates. The reason for this is questions about the representativeness of the average actual market ratios of PE and PBV, on one hand, and the reasonability of the values of the input variables used for developing the fundamental PE and PBV ratios, on the other hand. Further research is needed on the indicators for each of the three fundamentals, which determine the levels of fundamental ratios. This future research will focus on further development of the justification of the input ROE, g, and R_E, including the needed statistical tests.

Author Contributions

Conceptualization, D.N.; methodology, D.N. and Y.H.; formal analysis D.N. and Y.H.; investigation, D.N. and Y.H.; resources, D.N. and Y.H.; data curation, D.N. and Y.H.; writing—original draft preparation, D.N.; writing—review and editing, Y.H.; visualization, D.N. and Y.H.; supervision, D.N.; project administration, Y.H.; funding acquisition, Y.H.; All authors have read and agreed to the published version of the manuscript.

Funding

This publication contains the results of a study funded by a targeted subsidy of the University of National and World Economy, Contract No: NID NI-1/2023, led by Yanko Hristozov.

Data Availability Statement

Data used is from the National Institute of Satatistics of Bulgaria, and from Infostock website. The links to data used from infostock are available at the end of the reference list, named as “Data Sources”.

Conflicts of Interest

The authors declare no conflict of interest.

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Figure 1. Most commonly used market multiples in relative valuation methods. Source: (Bancel and Mittoo 2014).

Figure 2. Dynamics of SOFIX in the period October 2001–August 2024. Source: Figure developed by the authors. Data: https://www.infostock.bg/infostock/control/trading/index/pricestats/SOFIX (accessed on 15 August 2024).

Figure 3. Dynamics of the BGBX 40 in the period January 2014–August 2024. Source: Figure developed by the authors. Data: https://www.infostock.bg/infostock/control/trading/index/pricestats/BGBX40 (accessed on 15 August 2024).

Figure 4. ROE for the 5 largest non-financial sectors for the period 2008–2022. Source: Calculations and figure by the authors. Data from National Institute of Statistics.

Table 1. PE and PBV of BGBX 40 companies as of 15 August 2024.

No:	Company	Market Capitalization	Volume (1 Day)	P/E	P/B
1	Sopharma AD	1,025,188,033	12,592	11.07	1.47
2	CB First Investment Bank AD	760,332,480	17,301	5.29	0.48
3	Shelly Group AD	664,274,776	24,835	19.79	6.02
4	Evrohold Bulgaria AD	382,935,000	30,870	6.16	1.37
5	M+S Hydraulic AD	374,729,400	20,912	13.62	2.80
6	Gradus AD	353,232,629	0		1.24
7	Velgraf Asset Management AD	325,584,457	0	901.90	2.79
8	Holding Varna AD	294,459,723	0		1.58
9	Advance Terrafund REIT	273,203,392	420	21.85	0.84
10	Telematic Interactive Bulgaria	228,096,316	7092		3.95
11	Stara Planina Hold AD	210,000,000	970	18.53	1.51
12	CB Central Cooperative Bank AD	208,493,150	0		0.27
13	Sopharma Trading AD	195,373,485	0	19.51	1.85
14	Doverie United Holding AD	183,178,764	8520	2.57	0.38
15	Chimimport AD	177,338,237	2179	3.63	0.12
16	Investment Company Galata AD	175,542,359	0	2372.19	2.24
17	Balkan and Sea Properties REIT	159,278,588	0		2.86
18	Agria Group Holding AD	136,000,000	2500	9.71	1.33
19	Texim Bank AD	120,942,129	0	50.82	2.08
20	Monbat AD	117,000,000	4807	14.90	0.56
21	Alcomet AD	114,001,289	0		0.40
22	Albena AD	110,246,650	774	54.69	0.24
23	Telelink Business Services Group AD	106,875,000	34,308	9.12	3.64
24	Bulgarian Stock Exchange AD	100,059,472	228	7.20	2.74
25	Real Estate Fund Bulgaria REIT	98,383,067	2840	9.60	0.83
26	Hydraulic Elements and Systems AD	97,336,573	22,633	10.15	2.03
27	EMKA AD	85,930,914	0	7.27	1.53
28	Bianor Holding AD	72,511,784	9322	570.96	40.44
29	Sirma Group Holding	65,890,174	6649		0.88
30	Korado-Bulgaria AD	65,843,070	0	14.45	2.86
31	Sopharma Buildings REIT	54,599,160	3550		44.17
32	Neochim AD	52,556,288	0		0.36
33	Elana Agrocredit AD	49,960,582	5550	17.17	1.18
34	Sofia Commerce-Pawn Brokerage AD	40,823,666	2136	12.43	2.93
35	Eleven Capital AD	39,356,128	18,267	22.91	1.50
36	Zarneni Hrani Bulgaria AD	25,435,837	780	9.53	0.10
37	Zlaten Lev Holding AD	24,761,087	191		3.15
38	Petrol AD	24,581,162	0	6.77	1.15
39	Synergon Holding AD	22,030,618	2818	4.63	0.08
40	Billboard AD	6,450,000	0	10.84	0.30
	AVERAGE	190,570,386	6076	141.31	3.66
	MEDIAN	115,500,645	1553	11.75	1.49
	Adjusted AVERAGE			23.14	2.04
	Adjusted MEDIAN			11.75	1.49

Source: https://www.infostock.bg/infostock/control/issues (accessed on 15 August 2024). Calculations of the authors.

Table 2. Aggregate PE and PBV of BGBX 40 companies as of 15 August 2024.

Total Market Capitalization—BGBX 40	7,622,815,439
Aggregate Net Profit 2023—BGBX 40	534,996,000
Aggregate Equity 30 Dec 2023—BGBX 40	8,829,987,000
Aggregate (weighted average) Earnings Yield of BGBX 40	7.02%
Aggregate (weighted average) PE of BGBX 40	14.25
Aggregate (weighted average) PBV of BGBX 40	0.86

Source: https://www.infostock.bg/infostock/control/issues (accessed on 15 August 2024). Calculations of the authors.

Table 3. ROE for BGBX 40 for the period 2019–2023.

ROE—BGBX 40 Companies
	2019	2020	2021	2022	2023	2019–2023
Arithmetic average (mean)	9.29%	10.77%	12.31%	16.73%	7.86%	12.69%
Weighted average	8.52%	2.55%	7.27%	8.70%	5.83%	6.57%
Median	4.81%	4.04%	8.61%	10.53%	2.82%	6.54%

Source: Calculations of the authors. Data from https://www.infostock.bg/infostock/control/issues (accessed on 15 August 2024).

Table 4. Fundamental PE ratio for BGBX 40 for 2024 (one-stage model).

	Step of Amending ROE (in %):					10%
	Step of Amending “r” (in %):					10%
Values	Values of ROE
of	6.3%	7.6%	8.9%	10.2%	11.4%	12.7%	14.0%	15.2%	16.5%	17.8%	19.0%
R_E
	P/E	P/E	P/E	P/E	P/E	P/E	P/E	P/E	P/E	P/E	P/E
7.6%	11.8	13.8	16.6	20.7	27.4	40.2	75.1	530.6	−106.3	−48.6	−31.6
9.1%	8.8	9.9	11.3	13.0	15.5	18.9	24.3	33.9	55.4	148.8	−223.8
10.6%	7.0	7.7	8.5	9.5	10.8	12.4	14.5	17.5	22.0	29.4	44.1
12.1%	5.8	6.3	6.9	7.5	8.3	9.2	10.4	11.8	13.7	16.3	20.1
13.6%	5.0	5.4	5.7	6.2	6.7	7.3	8.0	8.9	10.0	11.3	13.0
15.1%	4.4	4.6	4.9	5.3	5.6	6.08	6.6	7.1	7.8	8.6	9.6
16.6%	3.9	4.1	4.3	4.6	4.9	5.2	5.6	6.0	6.4	7.0	7.6
18.2%	3.5	3.7	3.9	4.1	4.3	4.5	4.8	5.1	5.5	5.9	6.3
19.7%	3.2	3.3	3.5	3.6	3.8	4.0	4.2	4.5	4.8	5.1	5.4
21.2%	2.9	3.0	3.2	3.3	3.5	3.6	3.8	4.0	4.2	4.4	4.7
22.7%	2.7	2.8	2.9	3.0	3.1	3.3	3.4	3.6	3.8	4.0	4.2

Source: Calculations of the authors.

Table 5. Fundamental PBV ratio for BGBX 40 for 2024 (one-stage model).

	Step of Amending ROE (in %):					10%
	Step of Amending “r” (in %):					10%
Values	Values of ROE
of	6.3%	7.6%	8.9%	10.2%	11.4%	12.7%	14.0%	15.2%	16.5%	17.8%	19.0%
R_E
	P/BV	P/BV	P/BV	P/BV	P/BV	P/BV	P/BV	P/BV	P/BV	P/BV	P/BV
7.6%	0.75	1.05	1.47	2.10	3.12	5.10	10.49	80.81	−17.54	−8.64	−6.02
9.1%	0.56	0.75	1.00	1.32	1.77	2.40	3.40	5.16	9.14	26.43	−42.60
10.6%	0.45	0.59	0.76	0.97	1.23	1.57	2.03	2.67	3.63	5.22	8.40
12.1%	0.37	0.48	0.61	0.76	0.95	1.17	1.44	1.80	2.26	2.90	3.82
13.6%	0.32	0.41	0.51	0.63	0.77	0.93	1.12	1.36	1.64	2.01	2.47
15.1%	0.28	0.35	0.44	0.54	0.65	0.77	0.92	1.09	1.29	1.53	1.83
16.6%	0.25	0.31	0.38	0.47	0.56	0.66	0.78	0.91	1.06	1.24	1.45
18.2%	0.22	0.28	0.34	0.41	0.49	0.58	0.67	0.78	0.90	1.04	1.20
19.7%	0.20	0.25	0.31	0.37	0.44	0.51	0.59	0.68	0.78	0.90	1.03
21.2%	0.18	0.23	0.28	0.34	0.39	0.46	0.53	0.61	0.69	0.79	0.90
22.7%	0.17	0.21	0.26	0.31	0.36	0.42	0.48	0.55	0.62	0.70	0.79

Source: Calculations of the authors.

Table 6. Actual average vs. fundamental PE for BGBX 40 for 2024.

Market Ratio	Actual PE 2024	Fundamental PE 2024	Difference (k.2–k.3)	Difference (in %)
k.1	k.2	k.3	k.4	k.5
Mean PE	23.14	6.08	+17.06	+280.59%
Median PE	11.75	6.08	+5.67	+93.26%
Weighted aver. PE	14.25	6.08	+8.17	+134.38%

Source: Calculations of the authors.

Table 7. Actual average vs. fundamental PBV for BGBX 40 for 2024.

Market Ratio	Actual PBV 2024	Fundamental PBV 2024	Difference (k.2–k.3)	Difference (in %)
k.1	k.2	k.3	k.4	k.5
Mean PBV	2.04	0.77	+1.27	+164.94%
Median PBV	1.49	0.77	+0.72	+93.51%
Weight. aver. PBV	0.86	0.77	+0.09	+11.69%

Source: Calculations of the authors.

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Nenkov, D.; Hristozov, Y. Dynamics of Stock Prices on the Bulgarian Stock Exchange Against the Background of Fundamentals. J. Risk Financial Manag. 2024, 17, 576. https://doi.org/10.3390/jrfm17120576

AMA Style

Nenkov D, Hristozov Y. Dynamics of Stock Prices on the Bulgarian Stock Exchange Against the Background of Fundamentals. Journal of Risk and Financial Management. 2024; 17(12):576. https://doi.org/10.3390/jrfm17120576

Chicago/Turabian Style

Nenkov, Dimiter, and Yanko Hristozov. 2024. "Dynamics of Stock Prices on the Bulgarian Stock Exchange Against the Background of Fundamentals" Journal of Risk and Financial Management 17, no. 12: 576. https://doi.org/10.3390/jrfm17120576

APA Style

Nenkov, D., & Hristozov, Y. (2024). Dynamics of Stock Prices on the Bulgarian Stock Exchange Against the Background of Fundamentals. Journal of Risk and Financial Management, 17(12), 576. https://doi.org/10.3390/jrfm17120576

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Dynamics of Stock Prices on the Bulgarian Stock Exchange Against the Background of Fundamentals

Abstract

1. Introduction

2. Purpose and Methods

3. Literature Review, Theoretical Framework, and Hypotheses

3.1. Fundamentals as Determinants of Stock Index Levels

3.2. Using Market Ratios to Analyze the Level and Dynamics of Stock-Market Indexes at the BSE-Sofia

3.3. Hypotheses

4. Empirical Analysis

4.1. Analysis of the Price Dynamics on the Bulgarian Stock Exchange-Sofia

4.2. Analysis of Return and Growth Fundamental Indicators for Five Major Non-Financial Sectors in Bulgaria

4.3. Analysis of Return and Growth Indicators for the BGBX 40 Companies

4.4. Derivation of Fundamental PEs and PBVs for BGBX 40

5. Results and Discussion

6. Conclusions and Future Research

Author Contributions

Funding

Data Availability Statement

Conflicts of Interest

References

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