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Financial statement analysis: A data envelopment analysis approach

Author

Listed:
  • E H Feroz

    (University of Minnesota)

  • S Kim

    (Rutgers University
    Singapore Management University)

  • R L Raab

    (University of Minnesota)

Abstract

Ratio analysis is a commonly used analytical tool for verifying the performance of a firm. While ratios are easy to compute, which in part explains their wide appeal, their interpretation is problematic, especially when two or more ratios provide conflicting signals. Indeed, ratio analysis is often criticized on the grounds of subjectivity, that is the analyst must pick and choose ratios in order to assess the overall performance of a firm. In this paper we demonstrate that Data Envelopment Analysis (DEA) can augment the traditional ratio analysis. DEA can provide a consistent and reliable measure of managerial or operational efficiency of a firm. We test the null hypothesis that there is no relationship between DEA and traditional accounting ratios as measures of performance of a firm. Our results reject the null hypothesis indicating that DEA can provide information to analysts that is additional to that provided by traditional ratio analysis. We also apply DEA to the oil and gas industry to demonstrate how financial analysts can employ DEA as a complement to ratio analysis.

Suggested Citation

  • E H Feroz & S Kim & R L Raab, 2003. "Financial statement analysis: A data envelopment analysis approach," Journal of the Operational Research Society, Palgrave Macmillan;The OR Society, vol. 54(1), pages 48-58, January.
    • Handle: RePEc:pal:jorsoc:v:54:y:2003:i:1:d:10.1057_palgrave.jors.2601475
    DOI: 10.1057/palgrave.jors.2601475
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    References listed on IDEAS

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    1. Ehsan H. Feroz & Raymond Raab & Stephen Haag, 2001. "An Income Efficiency Model Approach to the Economic Consequences of Osha Cotton Dust Regulation," Australian Journal of Management, Australian School of Business, vol. 26(1), pages 69-89, June.
    2. Beaver, Wh, 1968. "Market Prices, Financial Ratios, And Prediction Of Failure," Journal of Accounting Research, Wiley Blackwell, vol. 6(2), pages 179-192.
    3. Charnes, A. & Cooper, W. W. & Golany, B. & Seiford, L. & Stutz, J., 1985. "Foundations of data envelopment analysis for Pareto-Koopmans efficient empirical production functions," Journal of Econometrics, Elsevier, vol. 30(1-2), pages 91-107.
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