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

Zeller, Thomas L.; Kostolansky, John; Bozoudis, Michail

doi:10.1108/ajb-10-2015-0030

Cited by 5 publications

(15 citation statements)

References 18 publications

(12 reference statements)

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“…Zeller, Kostolansky and Bozoudis (2016) identified a change to manufacturing firm factor groups compared to 35 years ago. Zeller et al (2016) find that financial ratio patterns for manufacturing firms correlate into eleven factor groups and that the composition of the factor groupings was stable for the period 2004 to 2013. The manufacturing factor groupings changed in three notable areas.…”

Section: Literature Reviewmentioning

confidence: 87%

“…Data for this study were obtained from Compustat using SIC codes 5300 through 5900 (retail sector) for the years 2004 to 2013. This is the same window of time studied by Zeller et al (2016) to enable comparability where appropriate. We included all firms reporting the requisite data for the chosen ratios for any year of the study.…”

Section: Methodsmentioning

confidence: 99%

“…Previous studies estimated cash flow from operations by adjusting net income plus The Clute Institute depreciation for accruals and deferrals because they preceded the introduction of a mandatory cash flow statement, highlighted in the introduction. Zeller et al (2016) used the same 58 ratios to enable comparability where appropriate. Principal Component Analysis (PCA), a method of factor analysis used in prior studies dating back to , was again used in the present study.…”

Section: Methodsmentioning

confidence: 99%

“…Third, a new factor surfaced in their work labeled current position, identified with two ratios --current assets/total assets and current debt/total debt. Zeller et al (2016) attribute the expansion of manufacturing factor patterns over previous studies to changes in reporting standards, business practices, and analytical tools not available in the period of previous studies. The changes identified in the manufacturing sector served as a basis to question the retail sector taxonomy of financial ratios in use today.…”

Section: Literature Reviewmentioning

confidence: 99%

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A Changed Taxonomy Of Retail Financial Ratios

Zeller

Kostolansky

Bozoudis

2017

JABR

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Thirty-five years ago researchers established a taxonomy of retail financial ratios. During the intervening period, extensive changes in retailing practices have been accompanied by equally extensive changes in financial reporting, marketing and management methods. Financial reporting standards have adapted to reflect these new domestic and international business practices, while technological innovation has produced continually evolving hardware and software advancements. This study investigates the extent to which the taxonomy of retail financial ratios has changed and, if justified, will establish a revised taxonomy. It extends prior work in two ways. First, it utilizes advanced statistical methodologies and computing technologies to provide a more discriminating investigation than previous researchers were capable of conducting. Second, this study investigates the current taxonomy of retail industry financial ratios as well as its stability over a ten-year period. Our findings identify a shift in the retail sector taxonomy of financial ratios. Empirical analysis points to a taxonomy consisting of five factors: capital intensiveness, cash position, inventory turnover, return on assets-return on sales, and return on equity-leverage. Contrary to expectations, a separate operating cash flow factor was not identified, despite the emergence of a mandatory cash flow statement during the intervening period. These findings provide an empirical basis to formulate testable hypotheses regarding the predictive and descriptive utility of retail financial ratios.

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Section: Literature Reviewmentioning

confidence: 87%

Section: Methodsmentioning

confidence: 99%

Section: Methodsmentioning

confidence: 99%

Section: Literature Reviewmentioning

confidence: 99%

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A Changed Taxonomy Of Retail Financial Ratios

Zeller

Kostolansky

Bozoudis

2017

JABR

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“…Zeller et al (2016) conducted a research to identify that to what extent the relationship between ratios have been changed. Factor pattern of fifty-eight ratios was identified through Principal Component Analysis.…”

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confidence: 99%

Re-Classification of Financial Ratios

Khan¹

2019

The European Proceedings of Social and Behavioural Sciences

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The study is aimed at re-classification of financial ratios with the help of statistical techniques. There are various approaches which are used by researchers and analysts to get the desired classifications. In this study Factor Analysis is used to reduce the categories to smaller numbers, containing the ratios with same characteristics. The data of forty-five listed firms was collected from the same industry (Chemical and Pharmaceuticals Companies). The final audited financial statements of ten years were collected through the websites of the sample firms. Twenty-three ratios under the classification of five categories were calculated. The results suggested five categories of ratios which covers all the ratios with a new classification. Most of the classifications are unknown to the readers. This study revealed that the ratios which are being studied in academic settings are different from the ratios which are calculated practically. Policy makers and researchers have to ponder on this point to reconcile the academic and industry practices.

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An IFRS-based taxonomy of financial ratios

Zeller

Kostolansky²,

Bozoudis³

2019

ARJ

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Purpose This study aims to identify a taxonomy of financial ratios derived from financial statements prepared using International Financial Reporting Standards (IFRS). The work first empirically establishes and then statistically validates the taxonomy of financial attributes captured in financial ratios. In 2005, the European Commission required that publicly traded companies in the European Union use IFRS as the basis for financial reporting. In the same year, Australia adopted IFRS as a basis for financial reporting. Since then, 120 countries and reporting jurisdictions have adopted IFRS as the basis for financial reporting. Given that IFRS predominate in the financial reporting world, it seems essential to establish and validate IFRS-based ratio attributes. Only then can reliance upon and comparability of these ratios be warranted (Altman and Eisenbeis, 1978). Using principle component analysis, the authors empirically identify nine stable attributes (factors) for ratios drawn from IFRS-based financial statements from 84 counties. The findings provides an empirical basis to formulate testable hypotheses regarding the predictive and descriptive utility of financial ratios draw from IFRS-based financial statements. Design/methodology/approach The paper begins with a broad category of IFRS-based financial ratios, 50, found in practice and research, including income statement, balance sheet, cash flow, profitability and liquidity measures. Then, a sample of companies from the manufacturing sector is segmented using IFRS as a basis of financial statement reporting. Next, principal component analysis, a method of factor analysis, is applied to empirically identify factors and financial attributes captured in financial ratios used in research inquiry and financial analysis. Findings The authors find that the financial attributes captured by IFRS-based ratios go well beyond the traditional measures of profitability, liquidity and solvency. The authors identify nine factors that are interpretable and stable over the period, 2011-2015: asset relationship, asset turnover, capital structure, expense insight, fixed asset usage, inventory turnover, liquidity, profitability margin and performance return. Interestingly, the authors did not find a separate cash flow factor. Most importantly, the results corroborate that IFRS-based ratios are consistent and comparable, despite innate country differences that have been shown to influence the application, interpretation and use of IFRS. Research limitations/implications The efforts are limited to the manufacturing sector. The financial attributes may be different in service, distribution and retail sectors. Also, limiting the effort are the ratios selected in this study. A broader range of ratios may widen the identification of unique stable factors over time. Practical implications The findings provide a basis for research and analysis efforts regarding the validity, comparability and stability of IFRS-based financial ratios. Most importantly, the results corroborate that IFRS-based ratios are consistent and comparable, despite innate country differences that have been shown to influence the application, interpretation and use of IFRS. The findings should be of interest to international and national financial reporting standard setters, investors and analysts. Originality/value An empirically evidenced classification system for IFRS-based financial ratios has yet to be determined based on a financial statements across a wide breadth of countries and reporting jurisdictions. Identification of stable interpretable factors, financial attributes, has been limited. The first is that inquiry has been limited to domestic-based, such as US Generally Accepted Accounting Principles, financial ratios. The second is inquiry has been limited to IFRS-based financial ratios within a specific country.

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

Cited by 5 publications

References 18 publications

A Changed Taxonomy Of Retail Financial Ratios

A Changed Taxonomy Of Retail Financial Ratios

Re-Classification of Financial Ratios

An IFRS-based taxonomy of financial ratios

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