Balance Sheet Ratios Research Articles

QUALITATIVE EASING IN SUPPORT OF A TUMBLING FINANCIAL SYSTEM: A LOOK AT THE EUROSYSTEM'S RECENT BALANCE SHEET POLICIES

Attention has recently been drawn to compositional changes in the Federal Reserve System's asset holdings and in particular the deterioration of the balance sheet of the Fed in the face of the current crisis. However, an analysis of the balance sheet policies of the Eurosystem is still missing. In this article we fill this gap by analysing the Eurosystem's balance sheet during the recent subprime crisis. The calculation of certain balance sheet ratios supports the assessment that a significant decrease in the quality of money has occurred.

On the Predictability of Risk Box Approach by Genetic Programming Method for Bankruptcy Prediction

Problem statement: Theoretical based data representation is an important tool for model selection and interpretations in bankruptcy analysis since the numerical representation are much less transparent. Some methodological problems concerning financial ratios such as non-proportionality, non-asymetricity, non-scalicity are solved in this study and we presented a complementary technique for empirical analysis of financial ratios and bankruptcy risk. Approach: This study presented new geometric technique for empirical analysis of bankruptcy risk using financial ratios. Within this framework, we proposed the use of a new ratio representation which named Risk Box measure (RB). We demonstrated the application of this geometric approach for variable representation, data visualization and financial ratios at different stages of corporate bankruptcy prediction models based on financial balance sheet ratios. These stages were the selection of variables (predictors), accuracy of each estimation model and the representation of each model for transformed and common ratios. Results: We provided evidence of extent to which changes in values of this index were associated with changes in each axis values and how this may alter our economic interpretation of changes in the patterns and direction of risk components. Results of Genetic Programming (GP) models were compared as different classification models and results showed the classifiers outperform by modified ratios. Conclusion/Recommendations: In this study, a new dimension to risk measurement and data representation with the advent of the Share Risk method (SR) was proposed. Genetic programming method is substantially superior to the traditional methods such as MDA or Logistic method. It was strongly suggested the use of SR methodology for ratio analysis, which provided a conceptual and complimentary methodological solution to many problems associated with the use of ratios. Respectively, GP will provide heuristic non linear regression as a tool in providing forecasting regression for studies associated with financial data. Genetic programming as one of the modern classification method out performs by the use of modified ratios. Our new method would be a general methodological guideline associated with financial data analysis.

Balance-Sheet Ratios and Stock Returns: An Analysis for Italian Banks

The paper assesses whether the monthly returns of the listed shares of Italian banks are predicted by changes in balance-sheet indicators. The sample covers the period from January 1997 to June 2003. Estimates use both unadjusted and risk-adjusted returns. Results show that the stock returns of Italian banks are positively related to past profitability, liquidity, and asset quality, while they are not significantly affected by banks' capital ratios. Furthermore, in the sample period an increase in traditional lending activity leads to higher stock returns.

An evaluation of the usefulness of cash flow ratios to predict financial distress

Purpose: With the introduction of the cash flow statement it became an integral part of financial reporting. A need arose to develop ratios for the effective evaluation of cash flow information. This article investigates cash flow ratios suggested by various researchers and suggests a list of ratios with the potential to predict financial failure. Design: The cash flow ratios suggested by researchers, from as early as 1966, are investigated and eight cash flow ratios selected for inclusion in an analysis to predict financial failure. Ten failed entities are selected for a cash flow evaluation by means of the selected ratios for five years prior to failure. For a comparison, non-failed entities in similar sectors are selected and also evaluated by means of the cash flow ratios. The mean values of each ratio, for each year prior to failure, were then calculated and the means of the failed entities were compared to the non-failed entities. Findings: The comparison revealed that cash flow ratios have predictive value with the cash flow to total debt identified as the best indicator of failure. It was also determined that, although failed entities have lower cash flows than non-failed entities, they also had smaller reserves of liquid assets. Furthermore, they have less capacity to meet debt obligations and they tend to incur more debt. The ratios of the failed entities were unstable and fluctuated from one year to the next. Finally, bankruptcy could be predicted three years prior to financial failure. Implications: Income statement and balance sheet ratios are not enough to measure liquidity. An entity can have positive liquidity ratios and increasing profits, yet have serious cash flow problems. Ratios developed from the cash flow statement should supplement traditional accrual-based ratios to provide additional information on the financial strengths and weaknesses of an entity .

Global Megabanks in Poland in 1998-2005: Do Size and Ownership Matter?

This paper analyses the impact of global financial megainstitutions on the Polish banking market in 1998-2005: a period of a dynamic economic growth, connected with Polish accession to the EU and a new wave of foreign capital inflow, coming mainly into medium-sized banks. The research question posed is whether size and ownership structure matter when it comes to the strategies and profitability of banks? The paper, analysing various balance sheet ratios computed by the Authors, offers a positive answer to this question, particularly when analysing the group of medium-sized banks, belonging to global mega-institutions. For them, the support from owner's technology, operations, human capital and corporate culture seems to constitute an important competitive advantage, resulting in a dynamic growth and superior financial results.

Trustees Back Recognition Of Same-Sex Civil Marriage

Trustees Back Recognition Of Same-Sex Civil Marriage

The Use of Accounting Numbers by Information Intermediaries in the Pre-SEC Era

We examine the extent to which financial statement ratios in the pre-SEC era were associated with Moody's securities ratings. A lack of association in this unregulated era would be consistent with subsequent accounting regulation improving the informativeness of financial reporting, whereas significant associations in predicted directions would indicate a need to quantify the incremental benefit, if any, of accounting and securities regulation. Because Moody's reported ratings components in addition to the overall ratings during our time period, we are also able to explore the structure underlying overall ratings. In particular, we examine the weights given to the components in the overall rating, as well as the accounting, contractual and market variables that determine each component. Our analysis indicates that bond ratings exhibit a significant positive association between income statement (ROE) and balance sheet (Current Ratio) ratios and overall Moody's bond ratings. Additional findings suggest that income statement and balance sheet ratios link structurally to the overall rating through differing components, as predicted. ROE is positively related to Moody's bond Safety rating (a measure of fixed charge coverage) while the Current Ratio links to Moody's bond Security rating (a measure of asset backing). Moody's third bond rating component, Salability, reflects the ease with which the bond can be readily sold. As predicted, we document that accounting ratios exert less influence over Salability compared to Safety and Security. However, unlike for Safety and Security, we document a significant positive between Salability and a measure of the extent of disclosure by the firm. Several of these findings extend to Moody's ratings of preferred and common stocks.

Accounting in three dimensions: a case for momentum

To this day, triple‐entry accounting and momentum accounting are seldom applied. We regret this because of the growing need for more forward‐looking information by management and external stakeholders and the apparent lack of theory and practical solutions. The ever‐increasing pace of the economy incites the need to disclose trends on the microeconomic level of a company. Further to this point, recent developments related to corporate governance, give new imputs to search for the answer to the question if we can improve the reliability and effectiveness of accounting in general, and financial statements in particular. This paper may contribute in to a better understanding of the concept that underpins momentum accounting. We present a notional example concerning the balance sheet ratio: return on equity. This example, so we hope, should encourage practitioners and academics to explore the usability of triple‐entry accounting and momentum accounting as alternative means to provide more forward‐looking information.

Dissecting EVA: The Value Drivers Determining the Shareholder Value of Industrial Companies

This study aimed to address issues of shareholder value creation. The EVA model of value creation was used in this study as it is arguably one of the best methods to express and quantify shareholder value creation. As a starting point, EVA was dissected into various building blocks or components (value drivers). In the empirical section of this study, multiple regression analyses of a company's EVA and identified variables were undertaken. The variables that explained or contributed most to EVA were a number of profitability ratios (in the case of the all company sample). Balance sheet ratios or variables did not provide significant explanations of a company's EVA in this sample. For companies that generate positive EVAs, the total regression coefficients not only increased in value, but, more importantly, there was a move away from profitability ratios towards balance sheet ratios. When the regression analyses were performed on the top 20 EVA companies, balance sheet ratios took centre stage. One can conclude that initially profitability (income statement) ratios are the most important factors in the wealth creating process. However, as companies become established wealth creators and keep improving on their performance, profitability ratios become less important. Efficient financing of the balance sheet, efficient fixed asset and working capital management become top priorities in creating shareholder value.

Mission and reality and why not?

The general question considered in this paper is do mission statements reflect reality, and if not why not? To answer these questions, 356 questionnaires were personally administered to middle and senior managers in six different geographic regions including the UK, Scandinavia, South Africa, Ghana, Singapore and New Zealand. The results from each region were remarkably similar. Overall, it was found that 82 per cent of the organisations surveyed had a mission statement, and 91 per cent of these mission statements had a customer focus. The startling finding was that only in 40 per cent of cases did managers believe that their mission reflects reality. They also claim that, when making operational decisions, the need to meet expense budgets and to achieve balance sheet (position statement) ratios of return on asset/investment are in 50 per cent of the cases more important than meeting the objective of customer service. The reasons why published missions do not reflect reality were found to be fourfold: (1) missions issued as mere public relations statements; (2) organisations not knowing and not genuinely making an effort to find out what customers want; (3) a lack of necessary resources; and (4) inappropriate personnel appraisal systems. Having established that customer service is only the first objective for 50 per cent of operational decision making, and that customer service is the focus for most mission statements (91 per cent), this paper then considers why there is a discrepancy between what mission statements say and what actually happens.

Balance Sheet Management: The Case of Short‐Term Obligations Reclassified as Long‐Term Debt

We investigate potential management of balance sheet ratios by a sample of firms that reclassify short‐term obligations to long‐term debt and subsequently declassify that debt (return it to the current liability section). Although aggregate measures of liabilities and equity remain unchanged when firms reclassify (declassify), the practice does increase (decrease) reported measures of liquidity, such as the current ratio, and long‐term leverage. Our results suggest that firms reclassify and declassify to smooth reported liquidity and leverage, relative to the prior year and to industry benchmarks. Our evidence is also consistent with firms working around restrictive debt covenants.

Unternehmensbeurteilung durch Diskriminanzanalyse mit qualitativen Merkmalen

The authors present an extended approach to the simultaneous processing of qualitative data and quantitative balance-sheet ratios in a linear discriminant analysis for credit assessment. The examined qualitative data consist of the accounting behaviour of an enterprise and a special defined cover ratio (equity [+ long-term debt] to fixed assets). The accounting behaviour describes whether an enterprise accounts in a profit-increasing „progressiv“, „neutral“ (no direct impact on profit) or a profit-decreasing „konservativ“ way. The qualitatively defined cover ratio describes the extent to which the fixed asset is covered by long-term capital. In the case that the amount of long-term capital exceeds the amount of fixed assets the qualitatively defined cover ratio shows which part of the long-term capital (equity, pensions or other provisions) contributes to this surplus cover. The demonstrated treatment of qualitative data together with quantitative data in a linear discriminant analysis can easily be applied to other qualitative data.

Employee Artefacts on the Balance Sheet: Model Illustration and Implications

If we cannot explain goodwill and potential goodwill in asset terms, they do not make sense. A partial explanation can be found in human assets or employee artefacts. A balance sheet model including employee artefacts is illustrated, and the consequences on the balance sheet and related financial key ratios are substantial. The inclusion of employee artefacts on the balance sheet (1) seems to make sense, (2) but it is still unclear if the inclusion will make organizations “better.” Even though the development of the balance sheet model is done in accordance with generally accepted accounting principles, it seems to (3) challenge the (elite) social order in organizations.

Early bankruptcy detection using neural networks

In 1993, Austria had the highest number of bankruptcies since 1945. The total liabilities came to approximately US$3 billion. Powerful tools for the early detection of company risks are very important to avoid high economic losses. Artificial neural networks (ANN) are suitable for many tasks in pattern recognition and machine learning. In this paper we present an ANN for early detection of company failures using balance sheet ratios. The neural network has been successfully tested with real data of Austrian private limited companies. The research activities included the design of an APL application with a graphical user interface to find out the relevant input data and tune the ANN. The developed APL workspace takes advantage of modern windowing features running on IBM compatible computers.

An Examination of the Substitution and Supplement Effects of Current Cost Ratios 1

The prior research on the usefulness of current cost data has concentrated on the incremental information content of current cost income measures by adopting a capital market perspective. The present study complements the prior research and focuses on the substitution and supplement effects of current cost balance sheet ratios by utilizing an individual user approach to financial analysis. This paper examines the distributional properties of current cost ratios in order to ascertain whether such properties are similar to the properties of historical cost ratios for firms in the primary manufacturing and retail industries. Furthermore, the relative rankings of the firms based on the current cost ratios are compared with the relative rankings based on the historical cost ratios for various fundamental financial dimensions. The findings indicate that substitution or supplement effects may exist for current cost ratios in both cross-sectional and intertemporal analyses of the financial constructs of firms. These effects are most evident for the leverage dimension on a cross-sectional basis and the profitability dimension on an intertemporal basis. Furthermore, the effects are more prevalent in the manufacturing industry as compared to the retail industry. These results suggest that the usefulness of current cost data may be on a firm-specific basis relative to the average performance of the industry containing that firm. In summary, the findings are consistent with both the predictive ability goal of external financial reporting and the evaluation of managerial performance objective of internal managerial reporting.

Investissement, endettement et situation financière des exploitations agricoles de 1979 à 1985

Investment, liabilities and financial situation of farms, during the period 1979-1985 - The analysis of the professional farms results, collected by the Farm accountancy data network, points out appreciable trends in the evolution of investment and liabilities during the period 1979-1985. Net investment has been reaching negative values since 1983, new investments do not equilibrate the depreciation of old ones. Moreover, liabilities raise all along the period and the average balance-sheet structure appears less favourable. Beyond those average values, the number of farmers for which main balance-sheet ratios show an unhealthy financial situation, has increased.

The Measurement of Liquidity

Liquidity measurement is an integral part of financial statement analysis, particularly in credit evaluations, and liquidity ratios are frequently employed in empirical research in accounting. Interest in this topic has increased recently because of the changes and potential changes in financial reporting requirements. The Securities and Exchange Commission now requires that each firm's annual report and 10-K include a discussion of its liquidity position, while the Financial Accounting Standards Board (FASB) has published a discussion memorandum entitled Reporting Funds Flows, Liquidity, and Financial Flexibility. One issue raised by this discussion memorandum is Should summary indicators of liquidity be provided (in financial reports)? Please specify the most useful summary indicators, giving reasons for your choice. (See FASB [1980].) There is disagreement about what constitutes a good summary indicator or measure of liquidity. Several researchers have proposed liquidity measures that incorporate cash flows in response to criticisms of the static nature of balance sheet ratios. While their proposed measures are intuitively appealing, there is rarely either a theoretical or empirical basis for preferring one over any others. In those instances wherein measures with a theoretical basis are proposed, their implementation is severely hampered by restrictive assumptions regarding when they may be applied. The purpose of this paper is to propose liquidity measures that are not subject to these limitations. We employ an axiomatic description of a firm's liquidity policy and liquidity position to obtain an expression for the likelihood that the firm will exhaust its liquid reserves (become technically insolvent). This expression may be used directly to assess

A rational expectations model of the U.K. under floating exchange rates

This paper constructs a model of an open economy with both trade and capital flows. Private sector wealth holders are assumed to be concerned with balance sheet ratios as in a portfolio choice theoretic model. Rational expectations in the strict Muth sense is introduced via the asset allocation decision by the private sector. International trade and capital flows are treated as in the monetary theory of the balance of payments. The model is constructed for the U.K. economy and simulation and forecasting exercises are conducted for the floating period.

FLUCTUATIONS IN OUR PRIVATE CLAIM-DEBT STRUCTURE AND MONETARY POLICY

THIS STUDY of the destabilizing role of private balance sheets compares the following time series (monthly in most cases) from I927 to I 947: ( i ) the volumes outstanding of demand deposits, currency outside the Treasury and the Federal Reserve Banks, time deposits, cashsurrender value of life insurance policies, postal savings, federal securities held by the non-financial public, farm debt, non-farm mortgage debt, long-term corporate debt to insurance companies and commercial banks, consumer debt, bank loans and discounts; (2) the ratio of a representative group of liquid assets to a representative collection of private debts; (3) the level of private expenditures; (4) income velocity of circulation; and (5) the volume of private investment. Observations include the following: (i) The turning points, and fluctuations in the rate of change, of the balance-sheet ratio usually preceded similar changes in the volume of private expenditures. (2) Turning points in both dollar and deflated volume of demand deposits consistently preceded both upturns and downturns in the level of private spending by two to fifteen months (except for the December, I945, downturn in the deflated value of demand deposits which had not been succeeded by a fall in the volume of expenditures). (3) Fluctuations often occurred first in bank investments, next in bank loans and discounts, and then in consumer and other debts. (4) Fluctuations in bank investments frequently led changes in the volume of private investment. (5) Fluctuations in the volume of short-term debts to the banks accompanied greater changes in the level of spending than did comparable fluctuations in the volume of bank investments. (6) The changing volume of claims not matched by private debts (e.g., government redeemables) appeared to have negligible effect on cash-balance requirements and velocity compared to the changing volume of claims possessing fair-weather liquidity matched by private debts with variable illiquidity. (7) Changing volume and illiquidity of short-term debts accompanied greater changes in the level of spending than did changing volume, real burden, or illiquidity of longterm debts. (8) Fluctuations in the volume and liquidity of near-