# Improving Returns on Strategy Decisions through Integration of Neural Networks for the Valuation of Asset Pricing: The Case of Taiwanese Stock

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## Abstract

**:**

## 1. Introduction

## 2. Neural-Network Estimation and Evaluation Model

#### 2.1. Neural Network

#### 2.2. Evaluation Model

## 3. Data and Results

#### 3.1. Descriptive Statistics

#### 3.2. BPNN Forecasting and Estimation

^{2}of the regression.

## 4. Evaluation, Analysis, and Discussion

#### 4.1. Evaluation and Calculation of Discounted Cash Flow

#### 4.2. Evaluation Results and Judgement

#### 4.3. Sensitivity Analysis

#### 4.4. Further Discussion and a Robust Test

## 5. Conclusions

## Author Contributions

## Funding

## Informed Consent Statement

## Data Availability Statement

## Acknowledgments

## Conflicts of Interest

## References

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Mean | Max. | Min. | S. Dev. | Skew. | Kur. | JB | Obs. | |
---|---|---|---|---|---|---|---|---|

Panel A: Index | ||||||||

Share prices | 2119.69 | 5830.00 | 418.89 | 1533.47 | 0.77 | 2.52 | 9.03 | 84 |

Rm | 2.76 | 30.90 | −29.15 | 10.63 | −0.09 | 3.66 | 1.64 | 84 |

SVI | 35.69 | 100.00 | 7.00 | 22.93 | 0.89 | 2.77 | 11.34 | 84 |

Panel B: Profitability | ||||||||

Gross profit margin | 0.53 | 0.71 | 0.38 | 0.11 | 0.13 | 1.73 | 1.96 | 28 |

NOPAT margin | 0.38 | 0.49 | 0.22 | 0.07 | −0.64 | 2.47 | 2.23 | 28 |

Growth of profit before tax | 0.39 | 1.25 | −0.23 | 0.43 | 0.26 | 2.10 | 1.28 | 28 |

Return on total assets | 0.17 | 0.35 | 0.04 | 0.09 | 0.24 | 1.87 | 1.75 | 28 |

Return on assets | 0.17 | 0.35 | 0.04 | 0.09 | 0.24 | 1.87 | 1.75 | 28 |

Return on equity | 0.22 | 0.46 | 0.05 | 0.12 | 0.21 | 1.97 | 1.44 | 28 |

Operating margin | 44.92 | 61.87 | 29.20 | 10.55 | 0.05 | 1.65 | 2.14 | 28 |

Panel C: Debt-Paying Ability | ||||||||

Current ratio | 310.88 | 458.86 | 194.49 | 58.06 | 0.39 | 3.04 | 0.73 | 28 |

Quick ratio | 284.22 | 416.36 | 177.50 | 57.42 | 0.41 | 2.53 | 1.03 | 28 |

Operating cash-flow ratio | 0.75 | 1.43 | 0.29 | 0.37 | 0.56 | 1.95 | 2.75 | 28 |

Current debt/debt | 0.99 | 1.00 | 0.98 | 0.00 | −1.65 | 6.74 | 29.01 | 28 |

Equity/assets | 0.76 | 0.85 | 0.64 | 0.04 | −0.79 | 4.08 | 4.27 | 28 |

Debt/equity | 0.31 | 0.57 | 0.18 | 0.08 | 1.24 | 5.36 | 13.66 | 28 |

Panel D: Operating Capacity | ||||||||

Inventory turnover | 5.58 | 7.90 | 3.41 | 1.21 | 0.32 | 2.48 | 0.78 | 28 |

Accounts payable turnover | 4.01 | 4.86 | 3.28 | 0.47 | −0.07 | 1.96 | 1.28 | 28 |

Assets turnover | 0.65 | 0.92 | 0.39 | 0.14 | −0.18 | 2.05 | 1.21 | 28 |

Sell expense/sales | 0.09 | 0.10 | 0.07 | 0.01 | −0.43 | 2.24 | 1.54 | 28 |

Admin expense/sales | 0.02 | 0.03 | 0.02 | 0.00 | 0.25 | 3.02 | 0.29 | 28 |

Term | Hidden Layers | Network Architecture | Learning Rate | Inertia Factor | MSE in Training | MSE in Testing |
---|---|---|---|---|---|---|

Panel A: SVI for four-quarter | ||||||

1 | 3 | 19-7-3 | 0.1 | 0.01 | 0.0842 | 0.0030 |

2 | 3 | 19-6-3 | 0.3 | 0.4 | 0.0794 | 0.0028 |

3 | 3 | 19-4-1 | 0.2 | 0.05 | 0.0752 | 0.0026 |

4 | 3 | 19-6-3 | 0.3 | 0.3 | 0.0590 | 0.0021 |

5 | 3 | 19-6-3 * | 0.2 | 0.1 | 0.0528 | 0.0018 |

Panel B: SVI for eight-quarter | ||||||

1 | 3 | 19-6-3 | 0.3 | 0.5 | 0.0865 | 0.0030 |

2 | 3 | 19-6-3 | 0.2 | 0.05 | 0.0750 | 0.0026 |

3 | 3 | 19-6-3 | 0.2 | 0.1 | 0.0509 | 0.0018 |

4 | 3 | 19-7-4 | 0.3 | 0.4 | 0.0460 | 0.0016 |

5 | 3 | 19-4-3 * | 0.2 | 0.04 | 0.0414 | 0.0014 |

Panel C: Ri (stock return) for four-quarter | ||||||

1 | 3 | 19-6-5 | 0.3 | 0.1 | 0.4676 | 0.0167 |

2 | 3 | 19-10-5 | 0.2 | 0.2 | 0.3967 | 0.0141 |

3 | 3 | 19-10-5 | 0.2 | 0.1 | 0.2771 | 0.0098 |

4 | 3 | 19-9-3 | 0.2 | 0.3 | 0.2655 | 0.0094 |

5 | 3 | 19-9-3 * | 0.2 | 0.2 | 0.2327 * | 0.0083 |

Panel D: Ri (stock return) for eight-quarter | ||||||

1 | 4 | 19-7-3 | 0.05 | 0.1 | 0.3586 | 0.0128 |

2 | 3 | 19-5-4 | 0.2 | 0.2 | 0.2427 | 0.0086 |

3 | 3 | 19-9-3 | 0.2 | 0.3 | 0.2352 | 0.0084 |

4 | 3 | 19-5-4 | 0.2 | 0.3 | 0.1987 | 0.0070 |

5 | 3 | 19-7-3 * | 0.1 | 0.05 | 0.1304 | 0.0046 |

Panel E: Ri (revenue growth rate) for four-quarter | ||||||

1 | 3 | 19-4-1 | 0.02 | 0.03 | 0.0347 | 0.0347 |

2 | 3 | 19-4-1 | 0.03 | 0.02 | 0.0219 | 0.0007 |

3 | 3 | 19-4-1 * | 0.02 | 0.01 | 0.0168 * | 0.0006 |

Panel F: Ri (revenue growth rate) for eight-quarter | ||||||

1 | 3 | 19-4-1 | 0.02 | 0.03 | 0.0347 | 0.0347 |

2 | 3 | 19-4-1 | 0.03 | 0.02 | 0.0219 | 0.0007 |

3 | 3 | 19-4-1 * | 0.02 | 0.01 | 0.0168 * | 0.0006 |

Variable | Reg. (r^{2}) | Slope | Intercept |
---|---|---|---|

SVI for four-quarter | 0.9901 | 1.0400 * | −0.0483 |

SVI for eight-quarter | 0.9779 | 0.9458 * | 0.0452 |

Ri (Stock return) for four-quarter | 0.8987 | 0.9937 * | 0.0701 |

Ri (Stock return) for eight-quarter | 0.9039 | 0.8876 * | 0.0701 |

Ri (Revenue growth rate) for four-quarter | 0.9893 | 0.9904 * | −0.0029 |

Ri (Revenue growth rate) for eight-quarter | 0.9958 | 0.9904 * | 0.0198 |

Periods | SVI | Stock Return | Revenue Growth Rate |
---|---|---|---|

2018.03 | 0.3529 | −0.1932 | 0.0568 |

2018.06 | 0.3657 | −0.2363 | 0.0854 |

2018.09 | 0.3471 | −0.1933 | 0.2158 |

2018.12 | 0.3660 | −0.0967 | −0.0639 |

2019.03 | 0.5866 | 0.3357 | 0.1291 |

2019.06 | 0.7028 | 0.2220 | 0.1208 |

2019.09 | 0.7171 | 0.1996 | 0.06185 |

2019.12 | 0.7254 | 0.7996 | −0.2763 |

Indicator | FY11 | FY12 | FY13 | FY14 | FY15 | FY16 | FY17 |
---|---|---|---|---|---|---|---|

Panel A: DCF Valuation Assumptions | |||||||

Risk-free rate (%) | 1.36 | 1.36 | 1.36 | 1.36 | 1.21 | 1.04 | 1.04 |

Market risk premium (%) | −20.46 | 11.21 | 15.36 | 10.42 | −8.29 | 13.03% | 18.96 |

Beta | 1.43 | 1.35 | 1.55 | 1.42 | 1.68 | 1.91 | 1.76 |

Debt/value of capital (%) | 20.47 | 26.05 | 21.15 | 24.33 | 24.53 | 20.84 | 20.28 |

Cost of debt (%) | 0.03 | 0.02 | 0.03 | 3.85% | 0.00 | 0.00 | 0.00 |

Years of growth (%) | 94.44 | 4.37 | −20.29 | 119.44 | 134.69 | −30.27 | 36.49 |

Years of growth (%) | 28.54 | 7.29 | 72.29 | 102.27 | 24.27 | −5.89 | 14.26 |

Panel B: Key DCF Drivers | |||||||

Sales growth (%) | 29.41 | 25.57 | 36.67 | 66.99 | 21.96 | −13.45 | 9.88 |

EBIT margin (%) | 36.52 | 33.93 | 41.92 | 50.14 | 52.19 | 58.43 | 60.16 |

NOPAT margin (%) | 74.74 | 69.93 | 82.96 | 83.16 | 74.54 | 53.08 | 47.87 |

Net fixed assets turns (%) | 4.19 | 4.57 | 8.54 | 8.36 | 5.39 | 5.61 | 4.81 |

Net WC turns (%) | 2.41 | 3.5 | 2.43 | 2.33 | 1.91 | 2.01 | 1.68 |

ROIC (%) | 20.87 | 17.88 | 24.89 | 31.84 | 28.76 | 23.42 | 22.41 |

EPS | 38.57 | 41.3 | 71.81 | 144.34 | 179.93 | 169.32 | 193.49 |

Periods | Real Price | Pred. Price | Pred. Gaps | Judgement |
---|---|---|---|---|

2018.03 | 3237.65 | 2159.456 | −0.3330 | Underestimated |

2018.06 | 4339.42 | 2769.627 | −0.3618 | Underestimated |

2018.09 | 3571.21 | 2970.950 | −0.1680 | Underestimated |

2018.12 | 3158.58 | 3823.144 | 0.2104 | Overestimated |

2019.03 | 4519.28 | 4383.435 | −0.0301 | Underestimated |

2019.06 | 3787.35 | 4617.363 | 0.2192 | Overestimated |

2019.09 | 4450.00 | 4835.738 | 0.0866 | Overestimated |

2019.12 | 4995.00 | 5176.731 | 0.0363 | Overestimated |

Periods | Daily | Pred. Gaps | Monthly | Pred. Gaps | Rolling (Daily) | Pred. Gaps |
---|---|---|---|---|---|---|

2018.03 | 3675.56 | −0.412 ***↓ | 3559.81 | −0.393 ***↓ | 3675.56 | −0.412 ***↓ |

2018.06 | 3825.74 | −0.276 ***↓ | 3888.40 | −0.288 ***↓ | 3751.93 | −0.262 ***↓ |

2018.09 | 4540.51 | −0.346 ***↓ | 4390.31 | −0.323 ***↓ | 4029.23 | −0.263 ***↓ |

2018.12 | 3273.68 | 0.168 ***↑ | 3253.55 | 0.175 ***↑ | 3830.40 | −0.002 ↓ |

2019.03 | 3980.65 | 0.101 ***↑ | 4172.15 | 0.051 ↑ | 3857.36 | 0.136 ***↑ |

2019.06 | 4106.97 | 0.124 ***↑ | 4019.86 | 0.149 *↑ | 3899.42 | 0.184 ***↑ |

2019.09 | 4012.00 | 0.205 ***↑ | 4171.81 | 0.159 ***↑ | 3916.11 | 0.235 ***↑ |

2019.12 | 4577.90 | 0.131 ***↑ | 4633.33 | 0.117 ***↑ | 4000.36 | 0.294 ***↑ |

Periods | Beta Top_10% | Pred. Gaps | Rolling Top_10% | Pred. Gaps | Beta Last_10% | Pred. Gaps | Rolling Last_10% | Pred. Gaps |
---|---|---|---|---|---|---|---|---|

2018.03 | 3571.09 | −0.395 ***↓ | 3571.09 | −0.395 ***↓ | 3958.63 | −0.454 ***↓ | 3958.63 | −0.454 ***↓ |

2018.06 | 3202.45 | −0.135 ***↓ | 3372.59 | −0.179 ***↓ | 4303.99 | −0.357 ***↓ | 4147.01 | −0.332 ***↓ |

2018.09 | 4953.13 | −0.400 ***↓ | 3925.78 | −0.243 ***↓ | 3734.14 | −0.204 ***↓ | 4001.29 | −0.258 ***↓ |

2018.12 | 3182.44 | 0.201 ***↑ | 3733.06 | 0.024 ↑ | 3338.70 | 0.145 ***↑ | 3828.44 | −0.001 ↓ |

2019.03 | 4266.30 | 0.027 ↑ | 3830.01 | 0.144 ***↑ | 3195.91 | 0.372 ***↑ | 3715.49 | 0.180 ***↑ |

2019.06 | 4548.75 | 0.015 ↑ | 3955.79 | 0.167 ***↑ | 3608.06 | 0.280 ***↑ | 3696.53 | 0.249 ***↑ |

2019.09 | 4111.43 | 0.176 ***↑ | 3978.97 | 0.215 ***↑ | 4116.47 | 0.175 ***↑ | 3759.52 | 0.286 ***↑ |

2019.12 | 4373.57 | 0.184 ***↑ | 4030.12 | 0.285 ***↑ | 4936.67 | 0.049 ***↑ | 3913.06 | 0.323 ***↑ |

Types | Higher Risk-Taking Levels | Lower Risk-Taking Levels | ||||
---|---|---|---|---|---|---|

Beta+1% | Beta+5% | Beta+10% | Beta-1% | Beta-5% | Beta-10% | |

Panel A: Using Revenue Growth with BPNN | ||||||

G_1% | 1.161 * | 1.138 * | 1.110 * | 1.173 * | 1.198 * | 1.231 * |

G_5% | 1.186 * | 1.162 * | 1.134 * | 1.198 * | 1.224 * | 1.258 * |

G_10% | 1.218 * | 1.193 * | 1.164 * | 1.230 * | 1.257 * | 1.292 * |

WACC_1% | 1.158 * | 1.146 * | 1.131 * | 1.165 * | 1.178 * | 1.196 * |

WACC_5% | 1.059 * | 1.049 * | 1.036 * | 1.065 * | 1.077 * | 1.092 * |

WACC_10% | 0.955 | 0.946 | 0.935 | 0.960 | 0.970 | 0.983 |

Panel B: Using Stock’s Return with BPNN | ||||||

G_1% | 0.924 | 0.905 | 0.882 | 0.933 | 0.954 | 0.981 |

G_5% | 0.949 | 0.929 | 0.906 | 0.959 | 0.980 | 1.008 * |

G_10% | 0.980 | 0.960 | 0.936 | 0.991 | 1.013 * | 1.042 * |

WACC_1% | 0.920 | 0.910 | 0.897 | 0.925 | 0.937 | 0.952 |

WACC_5% | 0.843 | 0.834 | 0.823 | 0.848 | 0.858 | 0.871 |

WACC_10% | 0.762 | 0.754 | 0.745 | 0.766 | 0.775 | 0.786 |

Panel C: Using SVI with BPNN | ||||||

G_1% | 0.920 | 0.903 | 0.883 | 0.928 | 0.946 | 0.970 |

G_5% | 0.945 | 0.927 | 0.907 | 0.954 | 0.972 | 0.997 |

G_10% | 0.976 | 0.958 | 0.937 | 0.986 | 1.005 * | 1.031 * |

WACC_1% | 0.916 | 0.907 | 0.897 | 0.920 | 0.930 | 0.943 |

WACC_5% | 0.843 | 0.836 | 0.827 | 0.847 | 0.856 | 0.867 |

WACC_10% | 0.767 | 0.760 | 0.753 | 0.770 | 0.778 | 0.787 |

Panel D: A Summary | ||||||

Mean | 0.971 | 0.957 | 0.939 | 0.979 | 0.995 | 1.016 * |

S.D. | 0.136 | 0.132 | 0.127 | 0.139 | 0.143 | 0.150 |

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**MDPI and ACS Style**

Chen, Y.-C.; Kuo, S.-M.; Liu, Y.; Wu, Z.; Zhang, F. Improving Returns on Strategy Decisions through Integration of Neural Networks for the Valuation of Asset Pricing: The Case of Taiwanese Stock. *Int. J. Financial Stud.* **2022**, *10*, 99.
https://doi.org/10.3390/ijfs10040099

**AMA Style**

Chen Y-C, Kuo S-M, Liu Y, Wu Z, Zhang F. Improving Returns on Strategy Decisions through Integration of Neural Networks for the Valuation of Asset Pricing: The Case of Taiwanese Stock. *International Journal of Financial Studies*. 2022; 10(4):99.
https://doi.org/10.3390/ijfs10040099

**Chicago/Turabian Style**

Chen, Yi-Chang, Shih-Ming Kuo, Yonglin Liu, Zeqiong Wu, and Fang Zhang. 2022. "Improving Returns on Strategy Decisions through Integration of Neural Networks for the Valuation of Asset Pricing: The Case of Taiwanese Stock" *International Journal of Financial Studies* 10, no. 4: 99.
https://doi.org/10.3390/ijfs10040099