Title

Financial statement analysis: A data envelopment analysis approach

Publication Date

1-1-2003

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.

Publication Title

Journal of the Operational Research Society

Volume

54

Issue

1

First Page

48

Last Page

58

DOI

10.1057/palgrave.jors.2601475

Source Full-text URL

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1167557

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