Timo Salmi
Professor of Accounting and Business Finance

Ilkka Virtanen
Professor of Economic Mathematics and Operations Research

Paavo Yli-Olli
Professor of Accounting and Business Finance

ON THE CLASSIFICATION OF FINANCIAL RATIOS:

A Factor and Transformation Analysis of Accrual, Cash Flow, and Market-Based Ratios

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.

KEYWORDS: 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.

Timo Salmi, Ilkka Virtanen and Paavo Yli-Olli (1990). On the Classification on Financial Ratios. A Factor and transformation analysis of accrual, cash flow, and market-based ratios. Acta Wasaensia, No. 25., University of Vaasa, Finland. Also published on the Word Wide Web as http://www.uwasa.fi/~ts/sera/

This publication is also downloadable as a single zipped file by ftp as tssera.zip

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Departments of Accounting and Mathematics, University of Vaasa, Finland

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