On the Classification of Financial Ratios; A Factor and Transformation
Analysis of Accrual, Cash Flow, and Market-Based Ratios
Timo Salmi, Ilkka Virtanen and Paavo Yli-Olli
Abstract
Factor and transformation analysis are used to find stable categories of
financial ratios, and to test hypotheses concerning accrual ratios, cash-flow
ratios, and market-based ratios. Six stable factors are observed for Finnish
data covering 1974-84. Contrary to expectations market-based ratios disperse
widely. Cash flow ratios show strong internal cohesion and stability as
expected. The expected dichotomy of accrual ratios into dynamic performance
and static financial standing measures gets some support. The conventional
text-book classification into profitability, liquidity, solvency, and turnover
measures does not get direct support. Results on the interdependence of firm
sizes and security betas is supported. Importance of measuring growth in
financial statement analysis is also supported.
Key words: Financial ratios, financial statement analysis, classification
of financial ratios, stability of financial ratios, cash flows, market-based
ratios, profitability, operating leverage, defensive interval measure, size
and beta, growth, factor analysis, transformation analysis.
(Acta Wasaensia, No. 25, 1990. Also available from World Wide Web
: <URL:http://www.uwasa.fi/~ts/simu/>).