A Longitudinal and Cross-Industry Study on the Stability of Financial Ratios of Malaysian Companies

Abstract

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.

Evaluating the Stability of the Financial Ratios of Jordanian Industrial Companies

“…A study of Malaysian companies (Yap, Zulkifflee, & Chong, 2013) revealed similar results. The results of that study were that EBITTA, CCL, TDTA and TDSF varied across some industries but did not vary over time and there were no significant interaction effects between Time and Sector.…”

“…The ratios that were selected for the study are ratios which have been used and identified as effective in several past studies (Yap, Zulkifflee, & Chong, 2013). The ratios are presented in Table 2 below.…”