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An Examination of Quarterly Financial Ratio Stability: Implications for Financial Decision Making

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An examination of quarterly financial ratio stability: Implications

for financial decision making

This paper assignment is described and explained about financial ratios that can influence financial decision making in the company. Financial ratios also can be calculated quarterly or annually. Actually there are seven dimensions of financial ratios, and there are two purposes in studying them. The first purpose is to assess the dimensional stability which are based on financial ratios that derived from the quarterly information. The second purpose is to compare both dimensions ( quarterly with annual ) that contained in annual information. The Stability of quarterly financial information is important because it is the right information that is used for the financial health of companies and operations within the company. Therefore, this information is typically used by investors and analysis. However, this information may change because of considerations such as limited existing data. Another consideration is the potential to smooth earnings, which means management can transform business activities in accrual accounting records for personal gain or the favorable management. Stability was evaluated by determining

whether the principal component factors derived from the quarterly financial ratios consistent

in the quarter and consistent with the factors derived from the annual information.

The results of this study indicate there are 12 factors that underlie both the annual and quarterly financial ratio data. This study provides evidence that the highest percentage of the variance in financial information represented by different factors when comparing the quarterly and annual results. There are three studies that being used, such as factor analysis of financial ratios, data selection and screening, and analysis. The 44 ratios calculated for the sample firms were subjected to principal component analysis.

Principal component analysis is a statistical technique useful for reducing the number of variables under consideration to a smaller number of factors while retaining the maximum amount of information contained in the original variables. Factor retention decisions can be based on underlying theoretical relationships in the data, prior empirical research using the same data, an eigenvalue criterion, or screen plots. There are 12 factors that identified, such as Leverage, Current Asset Turnover, Return on Sales Return on Equity, Fixed Asset Turnover, Return on Asset, Inventory Turnover, Working Capital Turnover, Inventory Intensity, Capital Ratio, Debt Ratio, Cash Turnover, and Sales Velocity.

Conclusion:

There are various potential factors that might affect decision maker in determine quarterly financial

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