Usefulness of financial ratios in a single industry

This paper reports the findings of a study on the relationship and ratio grouping of a well-published set of financial ratios within the context of a single, homogenous industry. The findings provide some insight into the validity of using single-industry ratio averages as standards to evaluate individual firm performance. Factor analysis was used to study the interrelationship among the ratios and to determine whether these ratios group in the “traditional” category of ratios suggested in the financial statement analysis literature. This analysis was followed by a cluster analysis of the composite ratios derived from the factor analysis to determine whether any consistent and stable statistical grouping of firms developed over time within the industry. These analyses were done for 72 companies for the period 1966–1975 using Dunn and Bradstreet ratios and Compustat data.