Ben Yap

Aims: This paper investigates the application of principal component analysis in the selection of financial ratios that are significant and representative for two industry sectors in Malaysia. Companies in different industries, even in the same country, have different operational, market and capital structures. Therefore, to use ratios that are found to be useful for one industry sector may not be valid for companies in another industry sector. Study Design: Research paper. Place and Duration of Study: Malaysia. Secondary data from 2006 to 2010. Methodology: 70 companies each from the consumer and trading and services sector respectively are randomly selected and analysed over a period of five years. An initial set of 28 financial ratios were factor analysed to obtain a smaller set of significant and useful ratios. Results: The results showed that only seven and nine ratios out of 28 for each sector respectively were identified as representative ratios. It is found that three ratios, cash flow to total assets, long-term debts to shareholders’ funds and current assets turnover, are the only ratios that were selected for both industries indicating that these three ratios are considered equally useful for these two industries while the others are more specific to their industry sector. Research Article

The 2007/08 financial crisis which began in the United States was not felt in Malaysia until the last quarter of 2008 where GDP stalled and then began to fall. The country has a high export to GDP ratio and in 2009 the contraction in manufacturing exports was steep. This paper investigates the effects of the crisis on the financial performance of 70 companies in the manufacturing sector over a period of 5 years from 2006 to 2010. Using factor analysis, an initial set of 21 financial ratios was reduced to just six significant ratios. Using this smaller set of representative ratios, the sample companies were cluster analyzed into 4 categories of poor, below average, above average and good financial performers. The results showed that there is a direct effect of the financial crisis on the financials of companies in the study where 46 companies categorized as good in 2006 fell to just 6 in 2010 while 7 companies in the poor category increased to 27 during the same period. Of particular...

This study examined sixty-four (64) listed companies over a period of ten years using a classic univariate method. Most studies on failure and bankruptcy predictions in the past forty years or more have been dominated by various multivariate statistical methods or some form of artificially intelligent systems. This study however, showed that the predictive powers of the individual ratios used individually and independently of each other has produced highly successful results. The means of the ratios showed significant differences between the companies that failed and those that were non-failed. A dichotomous classification test performed on the holdout sample using the cut-off point obtained from the analysis sample showed average classification accuracy of between 79% and 84%. One ratio, the Cash Flow to Total Debt perform particularly well with correct classification results of failed companies of between 81%% and 94% for both the analysis and the holdout sample and for all the fo...

The 2007/08 financial crisis which began in the United States was not felt in Malaysia until the last quarter of 2008 where GDP stalled and then began to fall. The country has a high export to GDP ratio and in 2009 the contraction in manufacturing exports was steep. This paper investigates the effects of the crisis on the financial performance of 70 companies in the manufacturing sector over a period of 5 years from 2006 to 2010. Using factor analysis, an initial set of 21 financial ratios was reduced to just six significant ratios. Using this smaller set of representative ratios, the sample companies were cluster analyzed into 4 categories of poor, below average, above average and good financial performers. The results showed that there is a direct effect of the financial crisis on the financials of companies in the study where 46 companies categorized as good in 2006 fell to just 6 in 2010 while 7 companies in the poor category increased to 27 during the same period. Of particular...

This paper investigates the use of factor analysis on financial ratios as well as examines their distributional properties. With an initial set of 28 financial ratios, seven ratios with the highest factor loadings were selected, and subsequently were assessed for normality. All seven ratios were found to be positively skewed. After removal of outliers and transformation of values, only one ratio achieves normality, while another ratio approaches normality. This study shows that it is not necessary to use many ratios for assessing financial performances. It also shows that financial ratios generally do not display a normal distributional pattern and normality can be improved for certain ratios only after remedial actions are taken.