Timo Salmi
Professor of Accounting and Business Finance
Teppo Martikainen
Associate Professor of Accounting and Business Finance
A Review of the Theoretical and Empirical Basis of Financial
Ratio Analysis
Abstract
This paper provides a critical review of the theoretical and
empirical basis of four central areas of financial ratio analysis.
The research areas reviewed are the functional form of the financial
ratios, distributional characteristics of financial ratios,
classification of financial ratios, and the estimation of the
internal rate of return from financial statements. It is observed
that it is typical of financial ratio analysis research that there
are several unexpectedly distinct lines with research traditions of
their own. A common feature of all the areas of financial ratio
analysis research seems to be that while significant regularities
can be observed, they are not necessarily stable across the
different ratios, industries, and time periods. This leaves much
space for the development of a more robust theoretical basis and for
further empirical research.
Keywords: Financial statement analysis, financial ratios, review
Acknowledgments: Our thanks are due to Manuel Garcia-Ayuso Covarsi
of the University of Sevilla, Spain, for his constructive comments.
Published as Timo Salmi and Teppo Martikainen (1994), "A Review of
the Theoretical and Empirical Basis of Financial Ratio Analysis",
The Finnish Journal of Business Economics 4/94, 426-448. Also
published on the World Wide Web as http://www.uwasa.fi/~ts/ejre/ejre.html
The next section (1. Introduction)
The contents section of Salmi and Martikainen (1994)
Other scientific publications by Timo Salmi in WWW format
This paper is also downloadable as a single zipped file by ftp as
farewa12.zip

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