Financial Statement Analysis: A Data Envelopment Analysis Approach
Ehsan H. Feroz
University of Washington - Tacoma-Milgard School of Business; Vernon Zimmerman Center, University of Illinois; US Government Accountability Office
Rutgers Business School - Camden
Raymond L. Raab
University of Minnesota, Duluth - Labovitz School of Business and Economics (LSBE)
July 21, 2008
Journal of the Operational Research Society, Vol. 54, pp. 48-58, 2003
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 when two or more ratios provide conflicting signals. Indeed, ratio analysis is often criticized on the grounds of subjectivity, that is the analysts must pick and choose ratios in order to asses 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 the managerial or operational efficiency of the firm. We test the null hypothesis that there is no relationship between DEA and traditional accounting ratios as a measure 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 the traditional ratio analysis. We illustrate the application of DEA to the oil and gas industry to demonstrate how financial analysts can employ DEA as a complement to ratio analysis.
Number of Pages in PDF File: 11
Keywords: Financial Statement Analysis, Ratio Analysis, Fundamental Analysis, DEA
JEL Classification: C44, C61, C67, D57,G1, G2, G3Accepted Paper Series
Date posted: August 8, 2008 ; Last revised: June 29, 2009
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