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 o...