Timo Salmi
Professor of Accounting and Business Finance

Teppo Martikainen
Associate Professor of Accounting and Business Finance

A Review of the Theoretical and Empirical Basis of Financial Ratio Analysis

Abstract

This paper provides a critical review of the theoretical and empirical basis of four central areas of financial ratio analysis. The research areas reviewed are the functional form of the financial ratios, distributional characteristics of financial ratios, classification of financial ratios, and the estimation of the internal rate of return from financial statements. It is observed that it is typical of financial ratio analysis research that there are several unexpectedly distinct lines with research traditions of their own. A common feature of all the areas of financial ratio analysis research seems to be that while significant regularities can be observed, they are not necessarily stable across the different ratios, industries, and time periods. This leaves much space for the development of a more robust theoretical basis and for further empirical research.

Keywords: Financial statement analysis, financial ratios, review

Acknowledgments: Our thanks are due to Manuel Garcia-Ayuso Covarsi of the University of Sevilla, Spain, for his constructive comments.

Published as Timo Salmi and Teppo Martikainen (1994), "A Review of the Theoretical and Empirical Basis of Financial Ratio Analysis", The Finnish Journal of Business Economics 4/94, 426-448. Also published on the World Wide Web as http://www.uwasa.fi/~ts/ejre/ejre.html


Goto: The next section (1. Introduction)
Goto: The contents section of Salmi and Martikainen (1994)
Goto: Other scientific publications by Timo Salmi in WWW format

This paper is also downloadable as a single zipped file by ftp as farewa12.zip

Department of Accounting and Finance, University of Vaasa,
Finland

tml@uwasa.fi
[ts@uwasa.fi] [Photo] [Programs] [Research] [Lectures] [Department] [Faculty] [University]