An evaluation of financial performance of companies : the financial performance of companies is investigated using multiple discriminant analysis together with methods for the identification of potential high performance companies
The objective of this study is to establish whether companies that utilise their resources more efficiently present specific characteristics in their financial profile, and whether on the basis of these characteristics a classification model can be constructed that includes, alongside resource utilisation measures, predictors related to other financial dimensions calculated from published information. The- research proceeds by examining the factors influencing companies' performance, and the reliabilty of published accounts. Discriminant analysis is chosen as the most appropriate technique of analysis. Its applications in the field of financial analysis are discussed -and an examination of the discriminant analysis technique is undertaken. For reasons of comparability and access to a large quantity of information, the analytical part of the study is based on data extracted from a computer readable tape provided by Extel Statistical Services Ltd. It starts by describing the financial variables to be used later on in the study, and proposing a classification framework that would be of assistance in identifying the financial dimensions of importance in relation to the problem under investigation. A discriminant model that correctly classifies 85 per cent of the companies is then constructed. It includes, besides measures of resources utilisation, measures of financial levarage, working capital management, cash position and stability of past performance. The-part of the analysis on the identification of potential well performing companies indicates that, although specific characteristics can be noticed up to five year before, it is only possible to construct a classification model with sufficient accuracy one year before a high level of performance is actually reached. Finally, an index of financial performance based on normal approximations of the z-score distributions from the model used to identify well performing companies is suggested and an assessment of the structural change experienced by companies rising from a less well to a well performaing status is presented.