Have changes in business practices and reporting standards changed the taxonomy of financial ratios?. Issue 2 (6th June 2016)

• Record Type: Journal Article
• Authors: Zeller, Thomas L.; Kostolansky, John; Bozoudis, Michail
• Editors: Burnie, David; Stefaniak, Chad
• Is Part Of: American journal of business. Volume 31:Issue 2(2016)
• Publication Date: 2016-06-06
• Subjects: Industrial management -- United States -- Periodicals; Management -- United States -- Periodicals; Business -- Periodicals; 658.00973
• DOI: 10.1108/AJB-10-2015-0030
• Languages: English
• ISSNs: 1935-519X

Abstract

Abstract : Purpose: Prior research established a seven dimensional taxonomy of financial ratios. This study proposes to identify the extent to which the previously identified relationships have changed, and, if appropriate, to establish an entirely new taxonomy of manufacturing industry financial ratios. Design/methodology/approach: We used Principle Component Analysis (PCA) to identify factor patterns for 58 financial ratios over the 10-year period 2004 to 2013. The validity of employing PCA was confirmed using the Kaiser-Meyer-Olkin Measure of Sampling Adequacy and Bartlett's Test of Sphericity. Findings: This study identified four additional financial analysis factors beyond the seven established by prior research. Notably, a separate cash flow factor did not surface as was the case in earlier work but an entirely new factor (current position) was identified. Research limitations/implications: This paper leaves to future research to establish the precise causes for the changes to the taxonomy of financial ratios and how to best utilize the new set of factors for financial analysis research. Practical implications: This paper identifies changes in financial ratio relationships to guide future researchers in selecting appropriate ratios for their studies. Originality/value: This study substantially improves and extends prior work in two areas. First, it utilizes advanced statistical methodologies and computing technologies that were unavailable to previous researchers. Second, it investigates not only the current taxonomy of manufacturing industry financial ratios, but also its stability over a recent ten year period.