Compositional Classification of Financial Statement Profiles: The Weighted Case

Pol Jofre-Campuzano and Germà Coenders ()
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Pol Jofre-Campuzano: School of Economics and Business Studies, University of Girona, 17003 Girona, Spain

JRFM, 2022, vol. 15, issue 12, 1-17

Abstract: This article classifies petrol retail companies in Spain based on their financial ratios using the compositional data analysis (CoDA) methodology. This methodology solves the most common distributional problems encountered in the statistical analysis of financial ratios. The main purpose of this article is to show that with the CoDA methodology, accounting figures presenting low values can have a disproportional influence on classification. This problem can be attenuated by applying weighted CoDA, which is a novelty in the financial statement analysis field. The suggested weight of each accounting figure is proportional to its arithmetic mean. The results of Ward clustering show that after weighting, the contributions of the accounting figures to the total variance and to the clustering solution are more balanced, and the clusters are more interpretable. Four distinct financial profiles are identified and related to non-financial variables. Only one of the profiles represents companies in financial distress, with low turnover, low return on assets, high indebtedness, and low liquidity. Further developments include alternative weighting schemes.

Keywords: compositional data analysis (CoDA); accounting ratios; cluster analysis; weights; logratios; petrol stations; Aitchison distance; Spain; Ward clustering (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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