Abstract

This paper investigates the use of factor analysis on financial ratios as well as examines their distributional properties. With an initial set of 28 financial ratios, seven ratios with the highest factor loadings were selected and subsequently were assessed for normality. All seven ratios were found to be positively skewed. After removal of outliers and transformation of values, only one ratio achieves normality, while another ratio approaches normality.

This study shows that it is not necessary to use many ratios for assessing financial performances. It also shows that financial ratios generally do not display a normal distributional pattern and normality can be improved for certain ratios only after remedial actions are taken.

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