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Timo Salmi - Ilkka Virtanen - Paavo Yli-Olli

ON THE CLASSIFICATION OF FINANCIAL RATIOS:

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

Acta Wasaensia, No. 25., Vaasa 1990

This paper is reproduced in the electronic format with permission of the Editor of the Publications Board of the University of Vaasa, Finland. Copyright (c) 1990 by the University of Vaasa and the authors.

CONTENTS:

Abstract

1. INTRODUCTION
1.1 Background of Classifying Financial Ratios
1.2 Background of Market-Based Ratios
1.3 Problem Statement and Approach
1.4 Defining Market-Based Ratios
1.5 Hypotheses

2. SELECTION OF THE FINANCIAL AND MARKET-BASED RATIOS
2.1 Accrual Ratios
2.1.1 Liquidity
2.1.2 Capital Adequacy
2.1.3 Profitability
2.1.4 Efficiency
2.1.5 Operating Leverage
2.1.6 Riskiness
2.1.7 Volume
2.2 Cash Flow Ratios
2.2.1 Background
2.2.2 Ratio Selection
2.3 Market-Based Ratios
2.3.1 Preliminaries
2.3.2 Firm Ratios
2.3.3 Combined ratios
2.3.4 Pure Market Ratios

3. EMPIRICAL RESULTS AND INTERPRETATION
3.1 Design of Analysis
3.1.1 Methods
3.1.2 Data
3.1.3 Processing
3.2 Hypothesis Testing and the Emerging Stable Factors
3.2.1 Dispersion of Market-Based Ratios
3.2.2 Dichotomy of Accrual Ratios
3.2.3 Cash Flow Ratios
3.2.4 Standard Financial Ratio Classification
3.3 Other Observed Stable Factors
3.3.1 Size & Beta Factor
3.3.2 Dynamic Liquidity Factor
3.3.3 Growth Rate Factor

4. SUMMARY

REFERENCES

Appendixes:

APPENDIX A: The Ratios
APPENDIX B: Varimax-rotated Factor Pattern for the Averages of the Ratios 1974-1984
APPENDIX C: Varimax-rotated Factor Pattern for the Averages of the Ratios 1974-1978
APPENDIX D: Varimax-rotated Factor Pattern for the Averages of the Ratios 1979-1984
APPENDIX E: Transformation Matrix 1974-78 to 1979-84 (L12)
APPENDIX F: Transformation Matrix Relationships
APPENDIX G: The Firms Included in the Sample

We acknowledge the skilful research assistance in processing the statistical analyses by Janne Lehtinen and Leena Lomakka.

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

Please use the following reference to this publication: Salmi, T., Virtanen, I and Yli-Olli, P. (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 available from Word Wide Web: <URL:http://www.uwasa.fi/~ts/sera/sera.html>.


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Departments of Accounting and Mathematics, University of Vaasa,
Finland

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