Financial Statement Analysis: A Data Envelopment Analysis Approach

11 Pages Posted: 8 Aug 2008 Last revised: 28 Nov 2018

See all articles by Ehsan H. Feroz

Ehsan H. Feroz

University of Washington, Milgard School of Business-Accounting ; University of Illinois at Urbana-Champaign; Government of the United States of America - US GAO Advisory Council; University of Minnesota, Labovitz School of Business-Department of Accounting; University of Minnesota, Carlson School of Management-Department of Accounting; American Accounting Association

Sungsoo Kim

Rutgers Business School - Camden

Raymond L. Raab

University of Minnesota, Duluth - Labovitz School of Business and Economics (LSBE)

Date Written: July 21, 2008

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 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.

This paper was categorized as a theoretical paper by the editors of the Journal of the Operational Research Society. The algorithms used in the paper provided a basis for Invention Disclosure with the University of Minnesota Patent Office.

Keywords: Financial Statement Analysis, Finance, Ratio Analysis, Fundamental Analysis, Coase Theory of the Firm, Data Envelopment Analysis (DEA), Financial Institutions, Capital Markets, Market Efficiency, Risk Management, Forensic Accounting, Econometrics, Operations Research

JEL Classification: C44, C61, C67, D57,G10,G14, G15, G20, G30, G18, G30, G38, M40, M41, M49, N20, P16

Suggested Citation

Feroz, Ehsan H. and Kim, Sungsoo and Raab, Raymond L., Financial Statement Analysis: A Data Envelopment Analysis Approach (July 21, 2008). Journal of the Operational Research Society, Vol. 54, pp. 48-58, 2003 . Available at SSRN: https://ssrn.com/abstract=1167557

Ehsan H. Feroz (Contact Author)

University of Washington, Milgard School of Business-Accounting ( email )

1900 Commerce Street, Campus Box 358420
Tacoma, WA 98402-3100
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HOME PAGE: http://www.tacoma.washington.edu/business

University of Illinois at Urbana-Champaign ( email )

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Government of the United States of America - US GAO Advisory Council ( email )

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University of Minnesota, Labovitz School of Business-Department of Accounting ( email )

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University of Minnesota, Carlson School of Management-Department of Accounting ( email )

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Minneapolis, MN 55455
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American Accounting Association ( email )

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Sungsoo Kim

Rutgers Business School - Camden ( email )

227 Penn Street
Camden, NJ 08102
United States
856-225-6584 (Phone)

Raymond L. Raab

University of Minnesota, Duluth - Labovitz School of Business and Economics (LSBE) ( email )

412 Library Drive
Duluth, MN 55812-3029
United States

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