Have changes in business practices and reporting standards changed the taxonomy of financial ratios?

Abstract

Purpose

Prior research established a seven dimensional taxonomy of financial ratios. The purpose of this paper is 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

The authors used principle component analysis (PCA) to identify factor patterns for 58 financial ratios over the ten-year period 2004-2013. 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.

Citation

Zeller, T.L., Kostolansky, J. and Bozoudis, M. (2016), "Have changes in business practices and reporting standards changed the taxonomy of financial ratios?", American Journal of Business, Vol. 31 No. 2, pp. 85-97. https://doi.org/10.1108/AJB-10-2015-0030