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Best proxy to determine firm performance using financial ratios: A CHAID approach

Review of economic perspectives, 2022-09, Vol.22 (3), p.219-239 [Peer Reviewed Journal]

2022. This work is published under http://creativecommons.org/licenses/by-nc-nd/3.0 (the “License”). Notwithstanding the ProQuest Terms and Conditions, you may use this content in accordance with the terms of the License. ;ISSN: 1804-1663 ;ISSN: 1213-2446 ;EISSN: 1804-1663 ;DOI: 10.2478/revecp-2022-0010

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  • Title:
    Best proxy to determine firm performance using financial ratios: A CHAID approach
  • Author: Yousaf, Muhammad ; Dey, Sandeep Kumar
  • Subjects: Coronaviruses ; Czech firms ; Decision tree ; Decision trees ; Economics ; Financial analysis ; financial ratios ; firm performance ; G00 ; L25 ; Literature reviews ; Machine learning ; Manufacturing ; Performance evaluation ; Proxies ; Ratios ; Return on assets
  • Is Part Of: Review of economic perspectives, 2022-09, Vol.22 (3), p.219-239
  • Description: The main purpose of this study is to investigate the best predictor of firm performance among different proxies. A sample of 287 Czech firms was taken from automobile, construction, and manufacturing sectors. Panel data of the firms was acquired from the Albertina database for the time period from 2016 to 2020. Three different proxies of firm performance, return of assets (RoA), return of equity (RoE), and return of capital employed (RoCE) were used as dependent variables. Including three proxies of firm’s performance, 16 financial ratios were measured based on the previous literature. A machine learning-based decision tree algorithm, Chi-squared Automatic Interaction Detector (CHAID), was deployed to gauge each proxy’s efficacy and examine the best proxy of the firm performance. A partitioning rule of 70:30 was maintained, which implied that 70% of the dataset was used for training and the remaining 30% for testing. The results revealed that return on assets (RoA) was detected to be a robust proxy to predict financial performance among the targeted indicators. The results and the methodology will be useful for policy-makers, stakeholders, academics and managers to take strategic business decisions and forecast financial performance.
  • Publisher: Brno: Sciendo
  • Language: English;Czech
  • Identifier: ISSN: 1804-1663
    ISSN: 1213-2446
    EISSN: 1804-1663
    DOI: 10.2478/revecp-2022-0010
  • Source: Sciendo (De Gruyter) Open Access Journals
    AUTh Library subscriptions: ProQuest Central
    Alma/SFX Local Collection
    Coronavirus Research Database
    DOAJ Directory of Open Access Journals
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