Incorporating Complementary Ratios in the Analysis of Financial Statements

Abstract

Ratios are commonly used to extract information from accounting reports. However, ratios present only part of the information available in their two components. This article infers the functional form of the information discarded by ratios. It then develops ratio complements that incorporate the discarded information, showing examples of their use and discussing the benefits obtained. Ratio complements can detect size-related anomalies of the firm that standard ratios do not recognise, providing a measure of size efficiency with which other financial features can be compared. Consideration of both the ratio and its complement leads to the development of graphical representations of financial features. As well as being intuitive, these graphical representations are a first step towards the automation of financial diagnostics and may lead to a more technology-oriented analysis of financial statements.

Keywords: Financial Analysis, Financial Ratios, Complementary Ratios, Firm Size, Self-Organizing Maps

JEL Classification: C44, C45, G30, L25, M41