Composite Indicators: a Sectorial Perspective

Financial analysts, managers, lenders and academic researchers widely use financial ratios. For example, financial analysts use them to predict how well the securities of one company will perform relative to that of another one, and lenders use them to predict if the borrower will be able to sustain interests and pay the principal. Ratios measuring profitability, activity, efficiency and liquidity are considered. Since most financial ratios by themselves may not be highly meaningful, they should be viewed as indicators, with some of them combined to get a more complete picture of the company. [9] addressed this question by using composite financial indicators, and proposed a simple method for reducing the dimension of a composite indicator. The liquidity issue has been considered. In this paper we extend [9] results by following a sectorial perspective. Financial ratio industry averages may differ markedly and therefore it is of interest to explicitly take into account company sector when computing a composite financial indicator. The results indicate that both the short-term and the long-term liquidity point of view are important in ranking the companies irrespective of the sector they belong to. However, it is suggested to group the companies according to the industry sector they belong to before applying the dimension reduction procedure because the importance of the ratios differ between sector and sector. The comparison with principal component analysis is addressed