The purpose of this study is to test whether a set of six financial ratios that have been used extensively by practitioners and researchers and found to be useful for various purposes including company financial performance evaluations are stable across three different industry sectors and whether they are stable over time. The sample comprises a total of 180 listed companies covering a period of five years from 2006 to 2010. Analysis of variance and post hoc multiple comparisons were carried out for each ratio to see whether it exhibits a stable profile across industries and over time. The findings showed that four out of the six ratios displayed no significant differences across industries, one (Current Assets Turnover) showed significant differences among all three sectors while the remaining ratio (Cash Flow to Total Assets) showed significant differences between two of the sectors. The test results also showed that all the financial ratios except for Cash Flow to Total Assets for all three industry sectors are stable over time. This finding is surprising in that the years 2008 and 2009 are periods where the financial crisis is at its height and companies' financial data are expected to be adversely affected and where the means of the ratio values in these two years are expected to be volatile and unstable compared to the period before and after the financial crisis. The analysis also showed that there are no interaction effects between sector and time. Thus, some ratios are industry specific and some ratios cannot be extrapolated over time when evaluating financial performance or forecasting future trends.
Most studies on company financial performance have mainly focused on either the successful companies or companies that are already in financial distress. However, there is a large group of companies that are in between, that is they are average performers and can be described as belonging to the "grey" zone. The purpose of this study is to analyze the companies in the "grey" zone to identify those that are likely to go into financial distress over time and those that may progress into the good financial performing category. Utilizing 3 key financial ratios, 90 Malaysian publicly listed companies in the manufacturing sector were initially classified into 3 clusters using" Cluster Analysis" over the period 2006-2010. The classification accuracy in each year is then tested by applying Multiple Discriminant Analysis (MDA). Interestingly, a classification accuracy of more than 90% was obtained for each of the 5 years. The companies in the "grey" zone in the years 2006 and 2010 were further cluster analysed into the below average and into the above average clusters. Out of the 63 companies that were found to be in the "grey" zone in the 2 years under review, 31 companies or 50% improved their position, 18 companies or 28% declined with 14 companies or 22% remaining stagnant. Of special interest would be 5 companies that moved up 3 clusters from poor to good performers and 21 companies that moved up 2 clusters from poor to above average performers. Of concern would be 17 companies that move down one cluster and 1 company dramatically collapsing two clusters downward. A key finding of the study is that by appropriately utilizing financial ratios, investor risk can be minimized. In addition it enhances credit evaluation, stock market value and investment potential.
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