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New financial ratios based on the compositional data methodology

Author

Listed:
  • Salvador Linares-Mustar'os

    (University of Girona)

  • Maria `Angels Farreras-Noguer

    (University of Girona)

  • N'uria Arimany-Serrat

    (University of Vic-Central University of Catalonia)

  • Germ`a Coenders

    (University of Girona)

Abstract

Due to their type of mathematical construction, the use of standard financial ratios in studies analysing the financial health of a group of firms leads to a series of statistical problems that can invalidate the results obtained. These problems are originated by the asymmetry of financial ratios. The present article justifies the use of a new methodology using compositional data (CoDa) to analyse the financial statements of a sector, improving analyses using conventional ratios since the new methodology enables statistical techniques to be applied without encountering any serious drawbacks such as skewness and outliers, and without the results depending on the arbitrary choice as to which of the accounting figures is the numerator of the ratio and which is the denominator. An example with data of the wine sector is provided. The results show that when using CoDa, outliers and skewness are much reduced and results are invariant to numerator and denominator permutation.

Suggested Citation

  • Salvador Linares-Mustar'os & Maria `Angels Farreras-Noguer & N'uria Arimany-Serrat & Germ`a Coenders, 2022. "New financial ratios based on the compositional data methodology," Papers 2210.11138, arXiv.org.
    • Handle: RePEc:arx:papers:2210.11138
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    References listed on IDEAS

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    Cited by:

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    2. Fernando Vega-Gámez & Pablo J. Alonso-González, 2024. "How likely is it to beat the target at different investment horizons: an approach using compositional data in strategic portfolios," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 10(1), pages 1-17, December.
    3. Núria Arimany-Serrat & Andrey Felipe Sgorla, 2024. "Financial and ESG Analysis of the Beer Sector Pre- and Post-COVID-19 in Italy and Spain," Sustainability, MDPI, vol. 16(17), pages 1-17, August.

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